Spousal IRA: How Couples Can Save More
Saving money in the modern age seems a daunting task when we consider the wide range of options available to us — but using a Spousal IRA has proven to be a simple, yet productive way for couples to save money effectively.
It’s essential to understand what this financial instrument is, as well as the various benefits it provides that other savings accounts do not. Let’s take a deeper dive into this underrated way to save.
The basic rundown:
Simply put, a Spousal IRA allows one spouse to contribute to an IRA in their name for the benefit of their married partner. It is an an individual retirement account that allows couples to save money on a tax-deferred basis. The contribution limit is the same as for an individual IRA, and the money grows tax-deferred (or tax-free in the case of a Roth Spousal IRA).
Why is it better than a standard IRA?
With a run-of-the-mill IRA, you are unable to contribute to it unless you earn an income in a given year. However with a Spousal IRA, each spouse in a couple can contribute up to the maximum amount even if only one of them earns an income. The working spouse contributes to the IRA on behalf of their non-working spouse — all the way up to the contribution limit if possible.
Take the Johnson family. Mum earns $75,000 but can only contribute $6000 to her individual Roth IRA. However by taking advantage of Spousal IRA rules, she can put an additional $6000 into Dad’s individual Roth IRA.
Hence if you’re a spouse that doesn’t work, a Spousal IRA can allow you to contribute to a traditional or Roth IRA — provided you file a joint tax return with your working spouse. It seems an ideal option for couples where one spouse is a stay-at-home parent.
The two types of Spousal IRA’s
There are two types of Spousal IRAs — traditional and Roth. With the traditional one, contributions are made with pretax dollars and grow tax-deferred. This means that taxes are not owed on the account until withdrawals are made in retirement.
With a Roth Spousal IRA, contributions are made with after-tax dollars and grow tax-free. This means that taxes have already been paid on the account and no taxes are owed when withdrawals are taken in retirement.
Everyone pays tax. Even employers have to generate a W-2 form and pay employment tax for employees they hire. Having the opportunity to save money on taxes using these two types of Spousal IRA’s is priceless. It builds up brick by brick and — before you know it — you’re looking at a very successful retirement stockpile for you and your spouse.
The best way to decide which type of Spousal IRA is right for you is to speak with a financial advisor. They can help you determine what your specific goals are and how best to achieve them using this powerful tool.
The benefits of using a Spousal IRA:
1) Tax savings — As mentioned above, both traditional and Roth Spousal IRAs offer couples the opportunity to save on taxes now or later in retirement.
2) Simplicity — a Spousal IRA can be set up easily and does not require any special paperwork beyond what is needed for an individual IRA.
3) Flexibility — stay-at-home parents can benefit from Spousal IRA’s as it provides another mini tax haven to stash your cash for the future.
Making money from your day job is great, receiving your 1099 form with your extra non-employment income is even better; but no matter how much money you make — what you do with your income is even more important. The benefits above demonstrate that saving your money within a Spousal IRA seems an intelligent idea.
What to keep in mind:
1) The contribution limit for spousal IRA’s is identical to any other IRA: $6,000 (or $7,000 if you’re over age 50). This leads to the following Spousal IRA rules:
- A couple where only one spouse works can contribute up to $12,000 per year.
- If one spouse is 50 or older, then this increases to $13,000 per year.
- If both are 50 or older, then the maximum amount is $14,000 per year.
2) Withdrawals from a traditional Spousal IRA are subject to income taxes, while withdrawals from a Roth Spousal IRA are tax-free.
3) The Spousal IRA is NOT a joint account. It is a set of IRS rules that permits a spouse that doesn’t work to fund an individual retirement account.
How to get started with a Spousal IRA:
1) Both spouses set up an IRA and contribute the maximum amount each year using the working spouse’s income. If both of you already have an IRA, then it’s a simple ask to switch it to a Spousal IRA.
2) The money in the account grows tax-deferred (or tax-free in the case of a Roth IRA) until it is withdrawn in retirement.
3) Look after your expenses, gradually contribute to your income over the years, and watch your money grow!
Sounds simple enough? It is. Managing your money well can be a simple, and even fun process when you do the right research and come across that one brilliant idea. Spousal IRA’s might just be that one method where there is little downside with significant upside. Consider the contents of this article and get started with your own Spousal IRA if you feel it can help in your journey to save more.
