An IRA, or Individual Retirement Account, is a powerful retirement-planning tool. An IRA allows individual investors to save a portion of their earned income for retirement with tax-free growth and on a tax-deferred basis.
For people with earned income, an IRA is a no-brainer. For spouses who don’t work for pay, on the other hand, it may seem unfair that such a valuable account is unavailable to them. Thankfully, the rules governing IRAs allow the same saving opportunities via a spousal IRA.
What is a Spousal IRA?
A spousal IRA can be either a traditional or Roth IRA. A spousal IRA is an IRA that allows your spouse to make contributions in your name and is an exception to the rule that individuals must have earned income to make contributions to an IRA. However, it also comes with its own specific rules and limits that only apply to this kind of retirement account.
What are some the rules and limits?
Spousal IRAs are held to the same rules and limits for other types of IRAs. For example, the annual contribution limit is the same $5,500 ($6,500 for investors over 60). Some stipulations unique to a spousal IRA include:
- Both the account holder and the spouse making contributions must be married and file their taxes jointly.
- The spousal IRA must be held separately, meaning that the account holder owns the assets in the account.
- The income of the spouse making the contributions must be greater than or equal to the total contributions made for both spouses.
Who needs one?
Married couples who file their taxes jointly, who are already maxing out the annual contributions for the income-earning spouse, and who have the means to max out the spousal IRA as well, would be wise to consider setting up a spousal IRA.
Additionally, married couples who have a few decades before one or both of them are out of the workforce permanently should consider a spousal IRA. Maintaining an IRA for both spouses doubles tax-advantaged retirement savings. And while the annual contributions don’t seem like much, investing that amount over time and letting it compound can make a big difference when it’s time to take disbursements. 04
For example, let’s say you are the spouse with the earned income. You have your own IRA, and you max out your contributions over 30 years. During that time, you’ve enjoyed a conservative 7 percent annual return. At the end of those years, you’ll have over $561k. If you’d also maxed out a spousal IRA during that time, you and your spouse would have over $1.1 million, which will have a significant effect on the quality of life during retirement.
How much should we contribute?
Ideally, you and your spouse would max out annual contributions to any and all of your retirement accounts. However, even if you aren’t currently able to contribute the maximum, you should get started right away with whatever you can fit into your budget, and plan to allocate more funds when you can afford it. The more time you have to invest before retirement, the less you will need to save each month to reach your goals.
Any brokerage offering IRAs and other retirement accounts should also offer a spousal IRA, and will be able to walk you through setting one up and selecting funds to invest in. Many brokers even offer IRAs with no minimum opening deposit and no minimum monthly contribution, meaning you could get your savings plan started with a beginning contribution of $50 each month.
The important thing is to get started saving for your retirement as a couple as soon as possible, even if you are not able to max out the annual contribution right away. Although an increasing number of retirees depend on social security to fund their retirement, the sad truth is that experts predict that the Social Security system will be exhausted by the early 2030s. In other words, it is up to you and your spouse to plan for retirement.
In addition to building an emergency fund and getting rid of high-interest debt, such as credit cards, your retirement savings plan, which can include a spousal IRA, is a vital part of your family’s financial future. If you and your spouse qualify for a spousal IRA, see about setting one up right away. What you do now will determine the quality of life that you and your spouse will experience in your golden years.