Build a Bigger Nest Egg With a Spousal IRA

The following column from Phoebe Venable, CapWealth Advisors President & COO, appeared in The Tennessean on October 21, 2016.

spousal-ira3-editAccording to my favorite budgeting website, Mint.com, the calculated value of work done by stay-at-home mothers and fathers as an annual salary is approximately $100,000. Many would say the actual value is priceless — and might very well point out that the job is 24 hours a day, seven days a week. Not only do these admirable ladies and gents not receive nearly the credit they deserve, they often forget to spend time — or money — on themselves.

Smart and practical

Perhaps it feels like a selfish extravagance that would be more wisely directed toward your children or your home life, but funding a retirement account for yourself is a smart and extremely practical way for stay-at-home parents to invest in their future well-being and increase their overall household retirement savings. While there are no 401(k) plans for stay-at-home parents, there is the spousal IRA.

Similar to regular IRA

A spousal IRA is basically the same animal as a normal IRA except that the employed spouse’s income is used to fund the IRA for the non-employed spouse. Spousal IRA contributions may be permitted to either a traditional or a Roth IRA, but the Internal Revenue Service does have a few eligibility requirements for the spousal IRA:

  • You must be married and file joint income tax returns.
  • The employed spouse’s income must be at least the amount contributed annually to the spousal IRA.
  • The non-employed spouse must be under age 70 1/2 in the year of the contribution for a traditional IRA. If you are using a Roth IRA, there are no age restrictions.

The maximum annual IRA contribution for 2016 is $5,500 for those under the age of 50. If you are age 50 or older (up to age 70 1/2), the IRS allows you to “catch up” with an additional $1,000 contribution, bringing your total to $6,500. These spousal IRA contributions are fully deductible for married couples with modified adjusted gross income (MAGI) of $184,000 or less this year. Married couples with a MAGI above this income limit may still make, but not fully deduct, a contribution to a traditional IRA.

It’s your money

Because IRA stands for “individual retirement account,” you own the money that your spouse contributes because the account is in your name. If you already have an IRA established in your name, maybe from a 401(k) rollover after leaving a previous job, consider it a spousal IRA and make contributions into that account. If not, you can always open an actual spousal IRA anywhere that manages IRAs.

Do keep in mind the difference between a Roth and traditional IRA before you open your spousal retirement account. Contributions to traditional IRAs are tax-deductible (subject to income limitations). The account grows tax-deferred until you make a withdrawal. Distributions from traditional IRAs are taxed as income. Conversely, Roth IRA contributions are never tax-deductible. Contributions may be withdrawn at any time without taxes or penalties; earnings may be withdrawn tax-free and penalty-free once you reach age 59 1/2 and the account has been open for at least five years.

A larger nest egg

Don’t be hoodwinked by the notion that if you don’t earn a salary, you can’t contribute to — or don’t deserve — a retirement account. The spousal IRA is a great way for families to build a larger nest egg when one spouse isn’t earning a salary. In fact, with a spousal IRA you can make a real impact on your and your spouse’s standard of living come the golden years. Discuss with your financial adviser what type of spousal IRA will work best for your family.

Phoebe Venable, chartered financial analyst, is president and COO of CapWealth Advisors. Her column on women, families and building wealth appears every other Saturday in The Tennessean. To learn more about her or her firm, visit www.capwealthadvisors.com.