Can Your Spouse Save for Retirement Without Income? Yes, Here’s How!

retirement planning is often a team effort, and sometimes that means one partner is primarily focused on managing the household while the other brings in the income. But what happens if your spouse doesn’t have a traditional income? Can they still save for retirement? The good news is, yes, they absolutely can! Thanks to a smart financial tool called a Spousal IRA.

Understanding the Spousal IRA

A Spousal IRA is a type of Individual retirement account (IRA) that allows a working spouse to contribute to a retirement account for their non-working or low-earning spouse. This allows both partners to build a nest egg for the future, even if only one is actively employed.

Key Requirements for a Spousal IRA:

• You Must Be Married and Filing Jointly: The IRS requires that you and your spouse be legally married and filing your taxes jointly.
• One Spouse Must Have Earned Income: One spouse needs to have earned income, meaning income from a job, self-employment, or other sources that are subject to Social Security and Medicare taxes. This earned income is the foundation for contributing to both your own IRA and your spouse’s.
• Contribution Limits: The total contributions to both your IRA and your spouse’s IRA cannot exceed the combined amount of your earned income. In 2023, the maximum contribution for IRAs is $6,500 (with a $1,000 catch-up contribution for those age 50 and older). So, if you earned $10,000, you can contribute up to $10,000 combined to both your IRAs.

Benefits of a Spousal IRA:

• Retirement Security for Both Partners: The primary benefit is ensuring both spouses have a source of income during retirement. This is especially important for stay-at-home parents or those who take time off to care for family.
• Tax Advantages: Like traditional IRAs, contributions to a Spousal IRA may be tax-deductible, reducing your current taxable income. Roth Spousal IRAs offer tax-free withdrawals in retirement, making them a valuable option for long-term growth.
• Diversification: Investing through a Spousal IRA can help diversify your retirement portfolio, as you have more funds to allocate across different asset classes.
• Catch-Up Contributions: Spouses age 50 and older can contribute an additional “catch-up” amount each year, allowing them to accelerate their retirement savings.
• Potential for Growth: Like any IRA, a Spousal IRA allows your investments to grow tax-deferred (Traditional IRA) or tax-free (Roth IRA), potentially leading to significant gains over time.

Traditional vs. Roth Spousal IRA: Choosing the Right Option

As with regular IRAs, you have two main types to choose from:

• Traditional Spousal IRA: Contributions may be tax-deductible in the year they are made, and earnings grow tax-deferred. However, withdrawals in retirement are taxed as ordinary income. This is often best if you anticipate being in a lower tax bracket in retirement.
• Roth Spousal IRA: Contributions are not tax-deductible, but qualified withdrawals in retirement are tax-free. This can be advantageous if you expect to be in a higher tax bracket in retirement, or if you simply want the certainty of tax-free income later on.

How to Set Up a Spousal IRA:

1. Choose a Financial Institution: Research and select a reputable brokerage firm, bank, or investment company that offers IRAs. Consider factors like fees, investment options, and customer service.
2. Open an Account: Complete the application process to open a Spousal IRA in your spouse’s name. You’ll need to provide their Social Security number and other relevant information.
3. Fund the Account: Transfer funds from your earned income to the Spousal IRA, staying within the annual contribution limits.
4. Choose Your Investments: Select investment options that align with your risk tolerance and retirement goals. This could include stocks, bonds, mutual funds, ETFs, or a combination of these.
5. Monitor and Adjust: Regularly review the performance of your Spousal IRA and make adjustments as needed to ensure it remains aligned with your long-term objectives.

Conclusion:

A Spousal IRA is a powerful tool for couples where one spouse doesn’t have an income. It allows both partners to actively participate in building a secure retirement, regardless of their current employment status. By understanding the requirements, benefits, and different types of Spousal IRAs, you can make informed decisions that will help you and your spouse enjoy a comfortable retirement together. Consult with a financial advisor to determine the best strategy for your specific situation and ensure you are maximizing your retirement savings.

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