If you want to contribute money to an individual retirement account (IRA), the rules are relatively simple: You need to earn a verifiable income. But what if your partner works while you act as a stay-at-home spouse?
You might think that you’re ineligible to open up an IRA or save for retirement since you don’t earn a regular income. However, the IRS recognizes your contributions to the household as work, and you have the same opportunities to save using a spousal IRA.
What is a spousal IRA?
If your spouse is the family’s breadwinner, that can put you at a disadvantage when it comes to retirement savings. According to Victor Ricciardi, a financial management professor and author, spousal IRAs help bridge the gap and allow you to build your own retirement fund.
“Spousal IRAs are a wonderful way for married couples to build wealth even when one spouse does not have any earned income or has very little income to save for retirement,” says Ricciardi.
Under the standard rules, you need to earn income to contribute to any form of IRA. But with a spousal IRA, the IRS eliminates that requirement so that a stay-at-home husband or wife can save. For families who have decided to have one person stay home, it can be a huge help in saving money for the future.
A spousal IRA is not a unique form of IRA. It’s just a ROTH or traditional IRA that lets a nonworking partner contribute to a retirement account and get the same incentives as someone who is employed. Additionally, the nonworking person gets access to IRA investment options, including mutual funds and exchange-traded funds.
What are the spousal IRA rules?
A spousal IRA is not a joint retirement account for both partners. It is set up exclusively in one person’s name, and in the case of divorce, remains in that person’s possession. According to Ricciardi, that is an important distinction to keep in mind for your financial planning.
“A spousal IRA builds trust and financial literacy for a married couple since both individuals will have their own separate retirement accounts. This helps both partners realize the importance of planning for a wonderful retirement together,” says Ricciardi.
To open a spousal IRA and contribute money to it, you must be married and file your taxes together to show a source of income.
You can contribute to an IRA even if the working spouse has an employer-sponsored retirement plan, such as a 401k. The IRA can be a great way to supplement your retirement savings and boost your portfolio.
If you have a traditional IRA and your spouse’s employer does not offer a retirement plan, the contributions to the spousal IRA are completely deductible on your taxes. If you have a Roth IRA, the contributions are not tax deductible, but once you retire, your withdrawals are tax-free.
Who can make spousal IRA contributions?
You or your partner may contribute to a spousal IRA, as long as you file your taxes as married filing jointly.
If you do not work now, but did before and had an IRA in the past, there is no need to open a new one. You can just use the old IRA and make contributions as usual. If you decide to go back to work in the future, you can continue to contribute to the same IRA.
What are the spousal IRA contribution limits?
According to the IRS, the annual contribution limit for 2017 is $5,500, or $6,500 if you are 50 or older. You and your partner can contribute to your own IRAs, but your contributions cannot exceed your joint taxable income or the annual contribution limits on IRAs.
If you both contribute to an IRA, that means you can save up to $11,000 a year if you are under the age of 50.
“If a married couple fully contributes money to an IRA account, with the use of a spousal IRA they are saving twice as much towards retirement in a given year,” says Ricciardi.
Tax-deferred retirement accounts are an excellent vehicle to save for retirement, and spousal IRAs give stay-at-home partners a way to build their own savings. If you work with your partner, you can use your IRAs strategically to save more and give yourselves a strong nest egg.
If you stay at home but have not opened a retirement account for yourself, consider opening one right away.
If you have student loans, it can be difficult to find the extra money to save, but by saving a little now, the power of compound interest will give you a lot more money later on when you retire. Start saving now to reap the benefits in your golden years.
For more information on how to balance paying down student loan debt while saving for retirement, check out this article.
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