When you and your spouse are saving for retirement, you’re probably looking for ways to invest as much money as possible so you can live comfortably when you’re finally able to stop working. However, because most retirement plans require you to have an income before you can contribute any money, it may seem like you’re at a disadvantage if one spouse doesn’t work.
However, you’re not necessarily at a loss if you or your spouse chooses to take care of the home or raise children instead of working. A spousal IRA can help you save on behalf of a nonworking spouse.
What Is a Spousal IRA?
A spousal IRA is designed to allow a couple to make contributions in each spouse’s name, even if the income is only coming from one place. Married couples who file their taxes jointly may qualify for a spousal IRA.
A spousal IRA essentially allows you to open an IRA in your spouse’s name. Unlike checking accounts or savings accounts, you cannot share an IRA with your spouse. In opening the second IRA in your spouse’s name, you’re able to contribute twice as much to your retirement fund. Twice as many contributions mean you can double the amount you save over the years, giving you a better opportunity to save for a comfortable retirement.
A spousal IRA can either be a traditional IRA or a Roth IRA. Before you decide which is right for you, you’ll need to know the limitations and benefits of each.
Spousal IRAs: Traditional IRA vs. Roth IRA
When opening a spousal IRA, you need to decide whether a traditional IRA or a Roth IRA makes the most sense. In order to make the most educated decision, let’s look at the age limits, compensation limits and laws for withdrawing money.
If you’re planning to open a traditional IRA, your spouse must be under the age of 70½ for the year you plan to start contributing. However, a Roth IRA does not have age limits, so you can open this type of investment account no matter the age of your spouse.
If you’re considering a Roth IRA, you need to be sure you don’t make above the income limit. There is no income limit for a traditional IRA. Both types of IRAs do have limits as to how much you’re able to contribute. If you’re above a certain age, you can contribute an additional catch-up amount.
A Roth IRA provides additional benefits when you withdraw your money. Because all contributions are made with post-tax cash, you do not need to pay taxes on the money you’re taking out. This can be a great benefit when you’re funding your retirement. However, you are not able to deduct this money as you would with a traditional IRA.
Choosing the Right Spousal IRA
When selecting the right IRA for your spouse, you’ll want to consider a few different things. First, look at your own retirement plan and how much you’re saving. Based on this information, set goals for what you’d like to save for your spouse. What plan will help you achieve those goals?
You’ll also want to consider outside factors, such as the cost-of-living adjustments for certain retirement plans. These adjustments may change how much you’re able to contribute to your retirement funds, so be aware of how they are changing or growing.
A spousal IRA can make a huge difference when it comes to saving for retirement. If you have a spouse who is not working and does not plan to go back to work, consider what a spousal IRA could do for you and your retirement nest egg.
Anum Yoon is a personal finance blogger and journalist who strives to help others manage their money better. You can follow her blog, Current on Currency for her latest posts, or sign up for her weekly money newsletter.
Rick Pendykoski is the owner of Self Directed Retirement Plans LLC, a retirement planning company based in Goodyear, AZ. He has over three decades of experience working with investments and retirement planning, and over the last ten years has turned his focus to self-directed ira accounts and alternative investments. If you need help and guidance with traditional or alternative investments, call him today (866) 639-0066.