The choice to have one parent stay at home to help take care of the family is a deeply personal one that goes beyond finances.
Being a stay-at-home parent, or working part-time, can be meaningful and emotionally rewarding. However, taking time off from your career could put you at a disadvantage when it comes to retirement savings. According to a 2015 study by the Transamerica Center for Retirement, only 44 percent of stay-at-home mothers are saving for retirement. 51 percent do not have any sort of strategy for retirement.
Fortunately, there is one frequently overlooked tax benefit: the Spousal IRA.
Generally speaking, in order to make an IRA or Roth IRA contribution, you must have “compensation” from wages, tips, bonuses, professional fees, commissions, taxable alimony received, and net income from self-employment.
An exception to this rule is the Spousal IRA, which is a way to continue saving for retirement in your non-working years. It provides an important financial safety net for mothers and fathers who decide to pursue stay-at-home parenthood.
Spousal IRAs offer:
- An important safety net for spouses who earn little or no income
- An opportunity to keep the retirement savings of both spouses on track
- A larger potential tax deduction for a married couple
In this article, we’ll review the basics of opening and maintaining a Spousal IRA.
What is a Spousal IRA?
We all know the tax advantages of an IRA, but according to the rules, you can only contribute your own earned income, right? Not necessarily. A spousal IRA relaxes that requirement; a working spouse can contribute on behalf of a spouse who earns little or no income.
A spousal IRA isn’t a joint account, but using one can be an effective way for couples to double their tax-advantaged savings. It’s also a good way to offer a nonworking spouse the financial security of a retirement savings account.
What are the Spousal IRA rules?
Spouses who don’t work for pay can contribute to a Spousal IRA if they file taxes jointly with a spouse who does. Here are some rules and guidelines to be aware of.
You can contribute to a Spousal IRA for a nonworking spouse, up to the maximum annual limit of $6,000 in 2021. If the non-working spouse’s age is 50 or older, that spouse can also make catch-up contributions (limited to $1,000), raising the overall contribution limit to $7,000.
The couple’s combined compensation is equal or greater than their combined IRA contributions. That is, at least one spouse must have enough earned income to cover the contributions for both.
Say that Annie is working, making $250,000 a year, and her husband Robert is not working. She can contribute to her own traditional IRA, up to the maximum, but she can also contribute up to the maximum to her husband’s IRA.
Because a spousal IRA is just an ordinary IRA in the spouse’s name, the same strict income limits apply here. A nonworking spouse can open a Roth IRA, but only if they qualify.
The spousal IRA is not co-owned. It’s in the name of, and owned by, the nonworking spouse.
There is no age restriction on contributing to either traditional or Roth IRAs.
Traditional vs. Roth
Each spouse can use a Traditional or Roth IRA, or both.
Learn more about Traditional vs. Roth IRAs
With a Traditional IRA, you’ll contribute pre-tax dollars. Your money grows tax-deferred, and all withdrawals are taxed as current income after age 59 ½.
With a Roth IRA, you’ll contribute after-tax dollars. Your money grows tax-free, and you can make tax- and penalty-free withdrawals after age 59 ½.
As a bonus, contributing to a retirement account may grant you eligibility for the little-known Savers Credit. The Savers Credit gives a special tax break to low- and moderate-income taxpayers. It’s worth up to $2,000 for married couples who file jointly.
Your adjusted gross income must be $66,000 or less to qualify for the 2021 tax filing season. If you qualify, a Savers Credit can reduce or even eliminate your tax bill.
Advantages of a Spousal IRA
The Spousal IRA has all the wonderful benefits of a regular IRA. It offers a way to boost retirement savings in a tax-advantaged way. You’ll have access to a wide variety of investment choices, ranging from mutual funds and exchange-traded funds (ETFs) to individual stocks and bonds.
Though the maximum annual contribution limit of $6,000 ($7,000 for investors age 50 or older) might seem like just a drop in the bucket, over time, this annual contribution could make a real difference in a couple's nest egg.
What to Know Before Opening a Spousal IRA
A Spousal IRA is a plain old Traditional or Roth IRA that’s funded by the working spouse. Here are the most important rules to understand before opening a Spousal IRA:
- Your spouse owns their IRA. Even though you funded the account, they get to control their investments. The owner of the IRA gets to invest in the individual stocks and bonds, mutual funds, and ETFs of their choice.
- You must file jointly. A Spousal IRA isn’t an option for married couples who file separately.
- Your joint income is subject to the Roth income limits. In 2021, that joint income limit is $198,000. If you’re a higher earner, speak to your Fiduciary Financial Advisor about a backdoor Roth IRA.
- You can contribute to Traditional IRAs at any income level. There are no income limits for Traditional IRAs. However there are income limits for tax-deductible contributions if the earning spouse is covered by a retirement plan at work.
- You can contribute to Traditional IRAs at any age. No matter how old you are, as long as one of you is earning income, the earning spouse can continue funding an IRA for a nonworking spouse.
- Your spouse gets to choose their beneficiaries. Even if you fund your spouse’s IRA, they aren’t required to name you as the beneficiary, and they don’t require your consent to name someone else.
- Make sure you understand the big benefit of the Inherited/Beneficiary IRA. If your spouse designates you as the beneficiary, you can roll it over into your own IRA. The IRS will treat the money as if you were the original owner.
We Can Help
With proper planning, couples can still save for retirement on one income. The Spousal IRA effectively doubles your IRA savings rate—and thereby doubles your tax benefits, too! If you’d like to inquire about opening a Spousal IRA or planning for retirement, please fill out the form below. We look forward to hearing from you.
DISCLAIMER: Advisory Services offered through Prosperity Financial Group, Inc., an Independent Registered Investment Advisor. Securities offered through Fortune Financial Services, Inc. Member FINRA/SIPC. Prosperity Financial Group, Inc. and Fortune Financial Services, Inc. are separate entities.