Stay at home parents and spouses who have little-earned income can fall behind when it comes to saving for retirement. But, for those who are married and file a joint tax return, a spousal IRA may be well worth investment consideration.
Although there are a number of requirements, which are mentioned below, the spousal IRA may be a tax-efficient option for some couples to boost their retirement savings.
What is a Spousal IRA?
Like a regular IRA, a spousal IRA is a tax-advantaged, individual retirement account. It’s designed to allow an individual to set aside up to $5500 a year for one’s golden years (or $6,500 if you are age 50 or older).
Regular IRAs have income requirements making them off-limits to those who don’t earn enough income in a year to sufficiently cover the amount invested. This is true for anyone not earning an income, even if that person has chosen to pass on paid work in order to do the difficult work of raising children or taking care of elderly parents.
Recognizing this problem, the IRS created the spousal IRA. Which allows a non-workforce spouse or spouse with low-income to have an IRA set up in their name and funded with contributions from the working spouse’s income.
Not only does the spousal IRA allow both spouses to have retirement income accounts exclusively in his or her name, it also allows a couple to invest twice the $5500/$6500 IRA individual investment cap per year, assuming they meet the IRS income requirements. Even though these current contribution limits don’t seem like much, they can certainly add up over the years before retirement.
There are other rules that apply, however. These include age restrictions, whether you are investing in a traditional pre-tax IRA or post-tax Roth IRA, and whether the working spouse contributes to a retirement plan at work. It is important to check with your financial advisor or CPA about your specific tax situation if you are considering opening a spousal IRA.
Why Should I Invest in a Spousal IRA?
Saving for retirement is critical for everyone. But retirement investing is especially important for women, who are 80 percent more likely to live in poverty than men age 65 and older. Although it is not true in every family, the difference in retirement income partially occurs because women tend to step out of the workforce to take care of family members for some part of their career.
A spousal IRA becomes an ideal way to fill the retirement savings gap since it still allows a non-working spouse to invest for their retirement.
And even though statistics show near 40-year lows, 40% to 50% of marriages still end in divorce. This means it is really wise for a stay-at-home or low-income spouse to have at least some money exclusively in his or her name.
The gender difference in retirement income also occurs because women in the United States live an average of four to seven years longer than men. A couple’s savings might last for a man’s lifetime. But it’s less likely to cover a woman for all of her life. Because women are statistically likely to live longer, they need to be extra sure that their household’s retirement savings are robust and adequate for decades of retirement.
How do I Invest in a Spousal IRA?
Like a regular IRA, a spousal IRA allows you to choose a traditional IRA, for tax-deferred growth, or a Roth IRA, for tax-free growth. And IRAs are flexible, so you can open an IRA investment account with almost any investment brokerage company (for example, Vanguard or Ally Invest) with no minimum – unless the company or the funds you choose impose one.
You can also pick a variety of investments. Your choices include individual stocks and bonds, mutual funds, and exchange-traded funds. However, a broad-based mutual fund like an index fund can make it easy to invest, just try to keep your expense ratio low.
Additionally, the most important aspect to saving for retirement is to start investing as young as you can, as compound interest over time usually matters more than picking the ideal fund.
If a spousal IRA sounds right for your household, don’t delay. Contact a reliable brokerage company and start investing in a spousal IRA today.
Article written by:
Sara Robins, the creator of Recipe for Wealth, a new blog that combines her loves of food, finance, economics, and history all in one place. When not writing or doing freelance graphic design, Sara enjoys taking care of her family as a SAHM and investing in her community.
Excellent post, such an important topic! You’ve hit the big reasons women are often less well off financially. Another benefit of funding a spousal IRA when one spouse isn’t working, is that money will be available to the surviving spouse when a partner dies. Not fun to think about, but pensions (if you have one) often go away when the pensioner dies.
I highly recommend this! This is the vehicle by which we invest for my husband in an IRA annually as I am the sole earner. It’s so easy. And yet another way to reduce our pretax income!