I live in an area where one-income households are common. One question I am often asked is this one:
“How can I increase my retirement savings when my wife [husband] doesn’t work?”
This is a common conundrum for many who have maxed out an IRA, and wish that they could open another tax advantaged retirement account. They feel stymied (and punished) by the fact that their attempts to make a good home for their children limits the retirement options. Luckily, there is another option that I am happy to tell you about.
We are so used to retirement accounts being something that we get through an employer, or we get hung up on the requirement that you need earned income before you can open an IRA, that we sometimes forget that stay at home spouses have options too. The spousal IRA is a great way to boost your retirement savings with a tax advantaged account, and one that many single income households should seriously consider.
If you are the spouse of someone who has an earned income, you can have an IRA in your name, even if you aren’t actively earning an income. In this arrangement, your spouse, who earns income, makes spousal contributions to your IRA. There are eligibility rules, though. You have to be married, and you have to file a joint tax return. If the income earning spouse files as head of household or you file separately, the spousal IRA thing doesn’t work. Review your situation, and if you are looking to boost your retirement savings, consider contributing to a spousal IRA.
A spousal IRA works just like any other IRA. The same income limits and contribution limits apply. So, if you open a Roth IRA and contribute to it on behalf of a stay at home spouse, you are still subject to the income phase out once you make between $167,000 and $177,000 for 2010. And, of course, the contribution limit is $5,000 (unless you at least 50; then it’s $6,000).
The good news is that you can contribute the limit of $5,000 to the spousal IRA on top of the $5,000 you contribute to your own IRA. However, in order to make it work, the spousal IRA has to be held separately (not a joint IRA), and be established in your spouse’s name, using her or his Social Security Number (or tax ID number). This can help you effectively double the amount of money you contribute to one type of tax advantaged retirement account without having your spouse go out and get a job.
Reminders About IRA Contributions
Because spousal IRAs work like any other IRA, it is important to be up on the rules of IRAs in general. Some things to remember:
- Traditional IRA = pre-tax contribution. Your money grows tax deferred and your withdrawals are taxed as income.
- Roth IRA = after-tax contribution. Your money grows tax free and withdrawals are not taxed.
- Penalty-free withdrawals begin at age 59 1/2 (there are other situations for penalty-free withdrawals before that age, but those are exceptions, not the rule).
- Required minimum withdrawals start at age 70 1/2.
- Because you can make contributions through April 15, you should be clear about the tax year you are allocating the money to (especially if it is a traditional IRA).
- IRA contributions must be made with cash/check.
- You can automate your IRA contributions to simplify matters and ensure that you make regular contributions.
A spousal IRA can be a great way for single-income households to boost their tax advantaged savings, and meet their retirement goals. So, take a look. You may end up starting an IRA today!
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