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Save for Retirement With a Spousal IRA

Written by Guest Contributor - 14 Comments

This is a guest post from Adam Hagerman of Money Relationship. If you like what you see here, please consider subscribing to his RSS feed.

If you’re like most people, you may think that retirement is so far away that it can be dealt with later. The reality is that it is never too early to begin planning for retirement, and there is no better day than today. But some of you out there may be wondering, “How can we adequately save for retirement when my spouse and I only have one income?” Well, you’re in luck, as there are some options available to help you meet your goals.

Spousal IRAs

Whether you are a stay at home parent or simply taking time off work, you should still be taking the appropriate measures to save for retirement. Most individuals who work for a company have the option to save for retirement via a 401(k) or other savings plan.

Even if they don’t have a retirement plan at work, working individuals can save money in an Individual Retirement Account (IRA) because they have qualifying income. But what about those who do not have an income of their own, such as a non-working spouse? This is where the “spousal IRA” comes to the rescue.

A spousal IRA is a special type of account that is funded with the working spouse’s income. Technically, there really is no such thing as a spousal IRA. It just means that a non-working spouse can rely on a working spouse’s income to contribute to fund an IRA. In order to qualify, you must file a joint tax return, and the working spouse must make enough income to fund the account.

Based on current IRA contribution limits, you can contribute up to $5,000 ($6,000 if you are over 50) per year in either a traditional (deductible) IRA or a Roth IRA.

Traditional Spousal IRA

The non-working spouse can contribute up to $5,000 ($6,000 if over 50) to a traditional IRA as long as the working spouse has enough income to justify the contribution. These contributions can be deducted on the joint tax return up to a certain adjusted gross income (AGI) limit. Depending on your income tax bracket, this deduction can result in significant upfront savings.

The deductibility of the spousal IRA begins to be phased out when your joint modified AGI reaches $166,000 and is completely phased out at a modified AGI of $176,000. However, if the working spouse does not have a retirement plan at work, the full deduction can be claimed regardless of income. These contributions grow tax-deferred until retirement. Once withdrawn in retirement, the earnings are taxed at your ordinary income rate.

Roth Spousal IRA

If tax-free growth is more desirable, the non-working spouse can contribute to a Roth IRA. The Roth IRA allows you to contribute up to $5,000 ($6,000 if over 50). Just keep in mind that your contributions will become limited once your joint AGI reaches $166,000 and will be completely phased out once it reaches $176,000 (meaning you cannot contribute to a Roth IRA).

The big advantage of the Roth IRA is that, since you are placing after-tax dollars into the account, they will grow completely tax-free. That means that there will be no income taxes due when you take the money out in retirement.

Taxable Accounts

Although taxable accounts are not the preferred option for retirement saving, they may be advantageous for one income households. Since retirement options are limited for the non-working spouse (i.e., they have no workplace savings plans), a taxable account can be used to supplement retirement savings.

Because investments in this type of account will be typically be held for a long time horizon, they will be taxed at the favorable long-term capital gain tax rates when you liquidate them. Currently, the long-term capital gain tax rate is 5% or 15% depending on your marginal tax rate.

So there you have it. No more excuses. Start saving for retirement today! And remember… You have until April 15th to fund an IRA for last year, so you can still make up for lost time.

Published on February 8th, 2010 - 14 Comments
Filed under: Retirement, Saving & Investing, Taxes

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14 Responses to “Save for Retirement With a Spousal IRA”

  1. 1
    Michael Crowther Says:

    This is a good reminder for people. In our case, where my spouse does not work, we have contributed to a Roth IRA for her. We haven’t moved on to a traditional IRA yet, because we’re just barely maxing out on the Roth. ;-)

  2. 2
    KC Says:

    My husband and I have both always had Roth IRAs and in the past we’ve both worked. But a few years ago I quit to stay home, and we both continued to contribute to our Roths. But now we are no longer financially eligible for a Roth or the tax benefits of a traditional IRA (due to income limits). This is a good thing cause we’re making more money. But as the partner who isn’t earning a salary I often wonder if I shouldn’t have a traditional IRA (that currently wouldn’t be a tax deduction due to income limits). If something were to happen and I were left without a spouse my income would be lower and I’d still have this traditional IRA that wouldn’t be taxed as part of my regular income. What are your thoughts on this? Should I have the traditional IRA, eventhough it would currently provide no benefits but might in the event of the loss of a spouse, or just invest the money in taxable accounts and let it grow that way?

  3. 3
    daddy paul Says:

    Just a note to watch out for as far as traditional IRA’s. One year my wife worked one week as a substitute teacher. The school deducted from her wages for their retirement plan. That made her ineligible for a Traditional IRA for that year. We had made a contribution to her traditional IRA for the year in January. We found it most advantageous to reclassify the IRA as a Roth but it was messy since over a year had gone by. I would like to warn anyone that if you work one day in a given year for a company that has a pension plan income limits for a traditional IRA apply.

  4. 4
    BG Says:

    About the deductability of traditional IRA contributions. If I have a retirement account through my employer, and my wife does not: it seems to say that the income phaseouts begin at $166k.

    Is it only the spouse’s traditional IRA contributions that are deductible? or can I deduct mine as well?

    Thanks.

  5. 5
    Courtney Says:

    Does anyone know why the Roth IRA income eligibility limits for married filing jointly aren’t 2x as much as a single filer? A married couple can only have $166K in income for full contribution eligibility (an average of $83K each), but single people can have up to $105K and still be eligible for a full contribution. And a married couple would be totally phased out of contribution eligibility with only $10K of additional *combined* income, but a single person can earn $15K more before they are completely phased out of contribution eligibility.

  6. 6
    BG Says:

    nm on my question. I called the IRS and they told me that since I was covered by a retirement plan at my work then I am subject to the lower phase-out limits ($89k – $109k). Since my wife is not covered by a retirement plan at her work, then she is at the upper limits for whether her contributions are deductible (AGI of $166-$176). Even though we are married filing jointly, we are still considered two people with different limits for our IRAs..

    #5 Courtney) I agree, the IRS punishes married people…

  7. 7
    JP Says:

    Re: KC. Starting this year there are no income limits for converting an IRA to a Roth IRA. So if you cannot contribute directly to a Roth due to AGI you can contribute to a non-deductible IRA and then immediately convert it to a Roth IRA. If you have existing pre-tax IRA’s (traditional deductible) then the conversion is more complex and you’ll have to pay taxes based on how much you convert and how much of your total IRA balance is pre-tax.

  8. 8
    Dan Says:

    BG,

    The IRS only punishes married people who both work ;)

    My wife isn’t working while she finishes school. But as an MFJ, we (I?) have the benefit of 2x the standard deduction for a single and 2x the standard exemption for a single (don’t forget 2x the standard “making work pay” deduction/rebate/whatever for singles too). AND since the brackets are figured differently for MFJ vs single, my tax liability was about $4500 less than it would be had I not been married.

    So yeah, the IRS punishes multi-income married folks, but rewards the single-income families.

  9. 9
    Adam Says:

    Congress punishes married people, not the IRS. The IRS only interprets what congress writes. ;-)

  10. 10
    BG Says:

    #8Dan & #9 Adam) you are right, it’s the tax code, not the good folks who work for the IRS just doing their job.

    Dan: my wife works part-time, doesn’t make enough to have any taxes withheld from her paycheck (zero exemptions), yet her income is taxed at my highest bracket. So, you are correct that they only punish married couples who both work. That’s the ‘marriage-penalty’ that is still in effect. Congress did fix a part of the problem by raising the standard deduction for married couples to be 2x the single.

    If we want people to get married, then lets not penalize working married couples on their taxes. In our case, we’d be better off being ’single’, and just living together…

  11. 11
    JP Says:

    @ #10 – I don’t get it. How does the IRS punish two couples working? When I do my taxes they are always less (the total tax) if we file MFJ than if we were two singles filing separately.

  12. 12
    BG Says:

    @JP) Most of the marriage penalty was been fixed in 2003. But, still exists to some degree: the marriage penalty kicks in when the couple earn roughly the same amount of money (and at larger income levels). For example, if two single people both earn $100k (taxable) a year, then their combined tax is $38,204. If they were married and filed MFJ, then the tax is $39,028, an $824 increase ‘penalty’ for just being married. If the two earned $200k each, then the marriage-penalty is closer to $8,000…

  13. 13
    Courtney Says:

    @ JP – see my comment at #5 (if you missed it) about another way married 2-income couples are penalized. It was related to the subject of the post (IRAs) but I think it helped start the marriage penalty discussion :-)

  14. 14
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