Most people think you have to earn income to contribute to a retirement account and that is true if you are single. But a loophole for married couples allows both people to save for retirement, even if only one worker.
It is called a spousal IRA and it can increase pension savings and can potentially reduce taxable income for the year. Essentially, a spousal IRA is a regular IRA that can be either traditional or Roth, but there are special rules about who can have one and how much you can contribute.
Spousal IRA rules
To open a spousal IRA, you must meet all of the following criteria:
- At least one spouse must work and must serve enough money to cover all contributions to both spouses' IRA.
- You must be legally married and file tax as "married filing jointly."
- The unprocessing (or lower) spouse must be under the age of 70 1[ads1]/2 if you contribute to a traditional IRA.
If you meet these requirements, you can open a spousal IRA, or if you already have an IRA, a spouse can make a contribution to that existing account on behalf of the other. A spousal IRA is not a jointly owned account, but is in the unnamed spouse's name. All funds paid into this account belong to that spouse, even if the marriage is terminated.
It is important to be careful not to exceed IRA's annual contribution limits, which may change from year to year at the discretion of the IRS. Contributing too much will result in penalties for the excess amount, unless you withdraw it within the tax deadline. You are allowed to contribute up to $ 6,000 to an IRA in 2019 or $ 7,000 if you are 50 or older. These limits apply to the total contributions you make to any IRA in your name, both Roth and Traditional. You are not allowed to contribute up to $ 6,000 (or $ 7,000 if you're 50+) per IRA. But if you have an IRA in your own name and a spousal IRA for your non-working spouse, you can contribute to the annual limit in each person's name. So between you two, you can save as much as $ 12,000 or $ 14,000, if you are 50 or older, for retirement in 2019.
Benefits of a Spousal IRA
The main advantage of using a spousal IRA is that Couples can put aside more money for their retirement, even if only one spouse works while taking advantage of the tax benefits that come with those accounts.
Traditional IRA is subject to tax, which means that you do not pay tax on the money in the year that you earn it, but you must pay tax when you withdraw the money in retirement. With Roth IRA, deposits do not reduce your taxable income for the current year, but since they are done with after-tax, you pay no taxes when you withdraw the money from a Roth account at retirement.
You can make spousal IRA contributions to a traditional or Roth IRA or both. It is up to you to decide which accounts give you the best tax benefits. If you think you are in a higher income tax center today than you would like to be in retirement, a traditional IRA is the better choice. But if you think there's a chance you're going to be in a higher income tax on retirement, a Roth IRA is the way to go.
How to open a spousal IRA
You can open a spousal IRA with any brokerage firm offering IRAs. You will need some basic personal information such as the unspecified spouse's birth date and social security number, but the process is essentially the same as setting up a regular IRA.
When the account is open, the partner can contribute to the spousal IRA as long as both spouses comply with the rules mentioned above. The contributions may seem small, especially compared to the much higher contribution limits for a 401 (k), but they accrue over time. A $ 5,500 single investment could reach over $ 55,000 in 30 years, assuming an 8% return, according to the SEC's compound interest calculator.
A spousal IRA is a great way to get extra money for retirement, even if a spouse does not work. Consider opening one if you are qualified and if you and your spouse can afford to save some extra money and you need the savings increase.