If you want contribute money to an IRA for your retirement, the IRS rules are (uncharacteristically) straightforward: You must be under the age of 70 1/2 (for a traditional IRA; the Roth has no age restrictions) and you must have earned taxable income.
But unless gratitude, hugs, and works of art created with finger paints and crayons and glitter qualify as "earned income," a nonworking spouse would look at that paycheck requirement and assume that opening their own IRA was a no-go.
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Wrong-o, stay-at-home spouse! While your kids, the dog, and your partner might not formally acknowledge the six-figure paycheck worth of work you do, the IRS recognizes that you are indeed working while you're "not working" and that you should have the same incentives as 9-to-5 desk jockeys to set aside savings for your retirement.
The spousal IRA income requirement loopholeUncle Sam wants everyone to save for the future, so much so that he's sweetened the pot with some tax breaks to get us to squirrel away as much money as we can -- up-front tax deductions for traditional IRAs and tax-free benefits in retirement if you choose to go the Roth IRA route.
For stay-at-home spouses who might not make enough (if any) money of their own to qualify for IRA contributions, the IRS has come up with an alternative: the spousal IRA.
As long as the family earned income is high enough -- that is, the total earned income from both spouses -- any earned income that isn't used to fund the working spouse's IRA can be used for the nonworking partner's contribution to a spousal IRA.
Beyond that, there are some other rules that couples need to heed regarding spousal IRAs. I mean, we're talking about tax law here, so, of course, there are.
The rules/requirements of spousal IRAsWhen you two kids walked down the aisle (or sealed the deal Vegas-style through a drive-thru), you may have vowed to act as one in all matters related to marriage and money. However, in all things related to tax-advantaged savings accounts, the IRS does not treat retirement savings as a family matter.
The "I" in IRA stands for "individual," and that's exactly what the account is. Even if it the spousal IRA funded by the toil and labor of your union (and the working spouse's income), the account belongs to the nonworking spouse and is theirs and theirs alone until death or divorce do you part.
Therefore, one important rule of spousal IRAs is that the account must be held in the nonworking spouse's name and Social Security or tax identification number. If the nonworking spouse already has an IRA they opened during their formal working days, they can use that account for spousal IRA contributions. And if they later start working again and contributing their own income to an IRA, same goes: They can simply add that money to the same account.
Beyond those rules there are a few requirements to be eligible to contribute to a spousal IRA:
- You must be married
- You must file a joint income tax return (as opposed to being married and filing separately)
- Your household must have earned income of at least the total amount contributed to all IRAs (meaning both spouses' IRAs)
Types of spousal IRAsJust like the regular world of individual retirement arrangements, spousal IRAs come in two flavors: traditional and Roth.
In a much-appreciated show of consideration to taxpayers and financial writers, the IRS rules for spousal IRAs are not written in Sanskrit: The same IRA-related rules for the working member of the household apply to the nonworking spouse.
Things like age (yours, not your spouse's), income (for the total household), and whether your spouse contributed to an employer-sponsored retirement plan (e.g., 401(k)) will determine which type of IRA you can contribute to (Roth vs. traditional), how much money you can sock away, and whether your contributions will be tax deductible in the year that you make them.
Here's the information in handy table form to help nonworking spouses pick the best flavor of IRA for their retirement stash:
2015 Spousal IRA Cheat Sheet
Beyond the basics of contributions and deductibility issues, there are other account features that may sway you one way or the other in terms of choosing a traditional IRA or a Roth IRA. Cheat off our Roth IRA vs. Traditional IRA homework and get guidance on how to choose the best IRA for you and your significant other:
Don't fall behind when you're not workingYour retirement savings (and any tax savings options you had when you were bringing home the bacon) needn't go dormant during periods when you're not working. If you are half of a one-earner couple, a spousal IRA can offer a boost to your family's future way of life and ensure that while one spouse isn't working that they don't miss out on years of their investments compounding over time.
The article Spousal IRA Rules for Couples in 2015 originally appeared on Fool.com.
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