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.
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 Once withdrawn in retirement, the earnings are taxed at your ordinary income rate.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.
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.