Spousal IRAs: Empowering the Single-income Family

By Christopher Walker
Writer, mPower

In This Story Who Can Use Spousal IRAs? Your Choices The IRA Edge It's Your Future, Too!

Are you dependent on your spouse to build up your retirement reserves? Historically, most retirement savings have been accrued by employees participating in employer-sponsored plans.

Yet, spouses who don't earn income can contribute to their own retirement account through the spousal IRA option. But, there are some income limits for the working spouse which may dictate how you are able to contribute.

minute: read this article at a glance.

Most tax-deferred retirement savings vehicles, from defined-benefit plans to defined-contribution plans, require the person who's contributing to have earned income. That would seem to leave stay-at-home wives or husbands in the lurch when it comes to retirement planning.

Technical Terms Adjusted gross income (AGI) Defined-benefit pension plan Defined-contribution pension plan

Not quite. If your spouse has earned income but you don't, a spousal IRA offers you the chance to start building your own retirement nest egg.

A spousal IRA is not really a different kind of IRA; rather, it is a way for nonworking spouses to have a traditional or Roth IRA — without "earned" income of their own.

While the concept of a spousal IRA is gender-neutral, it seems that the large majority of married people who are not covered by retirement plans are women.

"Let's face it, these are almost always for women," says Nancy Frank, a certified financial planner in Manhattan, N.Y. In Frank's experience as a financial planner specializing in women's issues, spousal IRAs are one of the primary ways for stay-at-home women to look out for their own retirement.

Who Can Use Spousal IRAs?

The most a nonworking spouse can contribute to an IRA is $2,000 annually, up from a $250 limit before the 1997 Taxpayer Relief Act took effect. The limit for a spousal contribution will probably stay in line with that for other IRAs, according to Frank.

If you are a nonworking spouse looking to deduct your contribution to a traditional IRA, and your spouse is covered by an employer-sponsored retirement plan, then you need to look at your combined adjusted gross income (AGI).

If it is over $150,000, the amount you can deduct is reduced, and if it is over $160,000, you cannot deduct your contribution at all. You can still make a nondeductible contribution, however. For more on income limits, filing status, and deductibility of spousal IRAs, see IRS Publication 590.

The table below shows the income limits for deductible contributions to IRAs for married couples filing jointly.

If you want to contribute to a Roth IRA as a spousal IRA, the regular income limit for a Roth contribution remains in effect — $160,000.

It's interesting to note that the spousal IRA provision may allow a nonworking spouse to make a deductible contribution to a traditional IRA even if the working spouse is not eligible. This would happen if the working spouse were covered by a retirement plan at work and earned over the normal (nonspousal) AGI limit for taking a deduction under those circumstances ($62,000 for 2000).

For example, if the working spouse earns $75,000 a year and participates in a workplace retirement plan, he cannot make a deductible contribution to a traditional IRA because he is over the $62,000 limit. However, his stay-at-home wife can make a deductible $2,000 contribution to a traditional IRA because she is below the $150,000 limit that applies to her. In total, they can contribute $4,000 to their two IRAs, half of it being deductible.

Your Choices

Because spousal IRAs are basically an extension of current IRA rules, account holders have all of the account flexibility that IRAs can provide. That flexibility includes using either Roth or traditional IRA accounts. You can even have both types, as long as you contribute no more than $2,000 per person to all your IRAs combined each year.

"Spousal IRAs help women become better acquainted with investment techniques so that they are not neophytes" if left to manage retirement savings on their own. — Nancy Frank, certified financial planner in Manhattan, N.Y.

IRAs can also give you an extra chance to be actively involved in your own financial planning. Many women — whether they work or not — tend to defer the financial decisions in the household to their spouse, according to Frank.

Spousal IRAs provide a mechanism for stay-at-home women to get involved in constructing their own retirement plan, Frank said. "Spousal IRAs help women become better acquainted with investment techniques so that they are not neophytes" if left to manage retirement savings on their own, she says.

The IRA Edge

While IRAs do have limitations, they have some advantages over 401(k) plans. For one thing, you control what happens with your account. While a typical 401(k) has fewer than 12 investment options, IRAs often allow hundreds of different investment vehicles.

Also, if you don't like the service you're getting from your provider, you can simply roll your account to another company. You can't do that with a 401(k) account unless you can convince your employer to switch the whole plan over.

You can also take advantage of a Roth IRA, which allows you to contribute after-tax dollars and not pay any taxes on what you take out at retirement, if you meet the conditions. If you're several years away from retirement, this can be even more advantageous than the tax break you can get by making pretax contributions to a traditional IRA.

It's Your Future, Too!

One important element of the spousal IRA to keep in mind is that the account can be set up under your control, even if you aren't the breadwinner in your family.

The 50 percent divorce rate in the United States puts an extra burden on stay-at-home women, says Frank, precisely because very few of them have been involved with investing issues. While this article doesn't attempt to provide marital advice, it is not a bad financial decision to have at least some of your retirement assets in your own name and under your own management.

In the case of a divorce, when all of a family's retirement assets are kept solely in one spouse's 401(k) plan, for example, those assets can be split between the two parties with a Qualified Domestic Relations Order (QDRO). But, legal bureaucracy can tie those assets up at a critical time in your life. If you have assets in your own IRA, it might be easier to access, says Frank.

Related Reading Focus on Women: The Importance of Planning for Retirement Serious about Retirement and Your Beloved? Retirement Issues for Domestic Partners

For couples using the spousal IRA provision, one of the largest benefits is the ability to save enough retirement money in a financial world that is increasingly skewed towards the two-income family. 

The information provided here is intended to help you understand the general issue and does not constitute any tax, investment or legal advice. Consult your financial, tax or legal advisor regarding your own unique situation and your company's benefits representative for rules specific to your plan.

Spousal IRAs: Empowering the Single-income Family

By Christopher Walker
Writer, mPower

In This Story Who Can Use Spousal IRAs? Your Choices The IRA Edge It's Your Future, Too!

Are you dependent on your spouse to build up your retirement reserves? Historically, most retirement savings have been accrued by employees participating in employer-sponsored plans.

Yet, spouses who don't earn income can contribute to their own retirement account through the spousal IRA option. But, there are some income limits for the working spouse which may dictate how you are able to contribute.

minute: read this article at a glance.

Most tax-deferred retirement savings vehicles, from defined-benefit plans to defined-contribution plans, require the person who's contributing to have earned income. That would seem to leave stay-at-home wives or husbands in the lurch when it comes to retirement planning.

Technical Terms Adjusted gross income (AGI) Defined-benefit pension plan Defined-contribution pension plan

Not quite. If your spouse has earned income but you don't, a spousal IRA offers you the chance to start building your own retirement nest egg.

A spousal IRA is not really a different kind of IRA; rather, it is a way for nonworking spouses to have a traditional or Roth IRA — without "earned" income of their own.

While the concept of a spousal IRA is gender-neutral, it seems that the large majority of married people who are not covered by retirement plans are women.

"Let's face it, these are almost always for women," says Nancy Frank, a certified financial planner in Manhattan, N.Y. In Frank's experience as a financial planner specializing in women's issues, spousal IRAs are one of the primary ways for stay-at-home women to look out for their own retirement.

Who Can Use Spousal IRAs?

The most a nonworking spouse can contribute to an IRA is $2,000 annually, up from a $250 limit before the 1997 Taxpayer Relief Act took effect. The limit for a spousal contribution will probably stay in line with that for other IRAs, according to Frank.

If you are a nonworking spouse looking to deduct your contribution to a traditional IRA, and your spouse is covered by an employer-sponsored retirement plan, then you need to look at your combined adjusted gross income (AGI).

If it is over $150,000, the amount you can deduct is reduced, and if it is over $160,000, you cannot deduct your contribution at all. You can still make a nondeductible contribution, however. For more on income limits, filing status, and deductibility of spousal IRAs, see IRS Publication 590.

The table below shows the income limits for deductible contributions to IRAs for married couples filing jointly.

If you want to contribute to a Roth IRA as a spousal IRA, the regular income limit for a Roth contribution remains in effect — $160,000.

It's interesting to note that the spousal IRA provision may allow a nonworking spouse to make a deductible contribution to a traditional IRA even if the working spouse is not eligible. This would happen if the working spouse were covered by a retirement plan at work and earned over the normal (nonspousal) AGI limit for taking a deduction under those circumstances ($62,000 for 2000).

For example, if the working spouse earns $75,000 a year and participates in a workplace retirement plan, he cannot make a deductible contribution to a traditional IRA because he is over the $62,000 limit. However, his stay-at-home wife can make a deductible $2,000 contribution to a traditional IRA because she is below the $150,000 limit that applies to her. In total, they can contribute $4,000 to their two IRAs, half of it being deductible.

Your Choices

Because spousal IRAs are basically an extension of current IRA rules, account holders have all of the account flexibility that IRAs can provide. That flexibility includes using either Roth or traditional IRA accounts. You can even have both types, as long as you contribute no more than $2,000 per person to all your IRAs combined each year.

"Spousal IRAs help women become better acquainted with investment techniques so that they are not neophytes" if left to manage retirement savings on their own. — Nancy Frank, certified financial planner in Manhattan, N.Y.

IRAs can also give you an extra chance to be actively involved in your own financial planning. Many women — whether they work or not — tend to defer the financial decisions in the household to their spouse, according to Frank.

Spousal IRAs provide a mechanism for stay-at-home women to get involved in constructing their own retirement plan, Frank said. "Spousal IRAs help women become better acquainted with investment techniques so that they are not neophytes" if left to manage retirement savings on their own, she says.

The IRA Edge

While IRAs do have limitations, they have some advantages over 401(k) plans. For one thing, you control what happens with your account. While a typical 401(k) has fewer than 12 investment options, IRAs often allow hundreds of different investment vehicles.

Also, if you don't like the service you're getting from your provider, you can simply roll your account to another company. You can't do that with a 401(k) account unless you can convince your employer to switch the whole plan over.

You can also take advantage of a Roth IRA, which allows you to contribute after-tax dollars and not pay any taxes on what you take out at retirement, if you meet the conditions. If you're several years away from retirement, this can be even more advantageous than the tax break you can get by making pretax contributions to a traditional IRA.

It's Your Future, Too!

One important element of the spousal IRA to keep in mind is that the account can be set up under your control, even if you aren't the breadwinner in your family.

The 50 percent divorce rate in the United States puts an extra burden on stay-at-home women, says Frank, precisely because very few of them have been involved with investing issues. While this article doesn't attempt to provide marital advice, it is not a bad financial decision to have at least some of your retirement assets in your own name and under your own management.

In the case of a divorce, when all of a family's retirement assets are kept solely in one spouse's 401(k) plan, for example, those assets can be split between the two parties with a Qualified Domestic Relations Order (QDRO). But, legal bureaucracy can tie those assets up at a critical time in your life. If you have assets in your own IRA, it might be easier to access, says Frank.

Related Reading Focus on Women: The Importance of Planning for Retirement Serious about Retirement and Your Beloved? Retirement Issues for Domestic Partners

For couples using the spousal IRA provision, one of the largest benefits is the ability to save enough retirement money in a financial world that is increasingly skewed towards the two-income family. 

The information provided here is intended to help you understand the general issue and does not constitute any tax, investment or legal advice. Consult your financial, tax or legal advisor regarding your own unique situation and your company's benefits representative for rules specific to your plan.