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Spousal IRA: A Comprehensive Guide to Securing Your Retirement as a Non-Income-Earning Spouse

Key Takeaways:

  1. Spousal IRAs allow non-income-earning spouses to save for retirement based on their working spouse’s income, offering tax advantages and retirement security.
  2. Understanding eligibility, contribution limits, and investment strategies is essential for harnessing the full potential of a spousal IRA and securing your financial future.

 

Introduction

Are you a non-income-earning spouse without access to workplace retirement accounts? The world of retirement planning can seem challenging when you’re not part of the traditional workforce, but there’s a valuable tool that can help you achieve your retirement goals: the spousal IRA. In this comprehensive guide, we’ll walk you through everything you need to know about spousal IRAs, from understanding the basics to maximizing their benefits.

What Is a Spousal IRA?

Understanding the Basics

A Spousal IRA, or Spousal Individual Retirement Account, is a retirement savings account that allows married individuals to save for retirement based on their working spouse’s income, rather than their own. This means that even if you don’t have earned income, you can still contribute to an IRA, just like any other working individual.

Types of Spousal IRAs

Choosing Your Path to Retirement

There are two main types of spousal IRAs: Traditional and Roth.

  • Traditional Spousal IRA: Contributions to a traditional spousal IRA are made with pre-tax dollars, which can reduce your taxable income for the current year. Investment earnings grow tax-deferred, but withdrawals during retirement are subject to taxation.
  • Roth Spousal IRA: Contributions to a Roth spousal IRA are made with after-tax dollars, offering no upfront tax benefits. However, both investment earnings and withdrawals during retirement are entirely tax-free.

Choosing between a traditional and Roth IRA depends on your specific financial situation and goals. If you currently have a high household income and want to reduce your tax burden, a traditional IRA might be the way to go, provided your spouse’s income doesn’t exceed certain limits. On the other hand, if you have a relatively lower income and anticipate needing tax-free income in retirement, a Roth IRA could be the better choice. Remember, you can even contribute to both types of IRAs as long as your combined household income allows.

Benefits of Spousal IRAs

Unlocking Financial Advantages

Spousal IRAs offer several advantages to non-income-earning spouses:

  • Double the Contributions: By opening and contributing to a spousal IRA, both you and your working spouse can effectively double your IRA contributions each year. Instead of saving just $7,000 (based on the 2024 contribution limits), you can save up to $14,000, providing a substantial boost to your retirement nest egg.
  • Tax Benefits: Both traditional and Roth IRAs provide significant tax benefits. With a traditional IRA, you can enjoy a tax deduction in the year you make contributions, reducing your current-year tax liability. Roth IRAs, although offering no immediate tax break, provide tax-free income during retirement, which can lead to substantial long-term savings.
  • Saver’s Credit: Contributing to a spousal IRA makes you eligible for the Retirement Savings Contribution Credit, often referred to as the Saver’s Credit. This credit can reduce your tax bill even further, offering incentives to save for retirement.
  • Long-Term Retirement Planning: Spousal IRAs are essential for non-income-earning spouses, as they enable you to prioritize retirement savings while you’re not actively part of the workforce. Consistent contributions and time in the market are two crucial factors for a comfortable retirement. Investing regularly and allowing your investments to grow over many years can significantly increase your chances of reaching your retirement goals.

Spousal IRA Rules

Navigating the Guidelines

Before opening a spousal IRA, it’s crucial to understand the rules governing these accounts:

  • Eligibility Criteria: To contribute to a spousal IRA, your spouse must have earned income, and you must file a joint tax return. Additionally, specific income limits may affect your ability to contribute to traditional or Roth IRAs, so be sure to check the IRS guidelines.
  • Ownership of the Spousal IRA: While eligibility is based on your working spouse’s income, the spousal IRA is entirely owned by the non-income-earning spouse. This ownership structure provides financial autonomy and control over your retirement savings.
  • Contribution Limits: As of 2024, the IRS sets the contribution limit for IRAs at $7,000 per year, with an additional $1,000 catch-up contribution allowed for individuals aged 50 or older. However, your contributions cannot exceed your household’s taxable income. If your working spouse earns less than the maximum contribution limit, your contributions will be limited by their income.
  • Consequence of Exceeding Contribution Limits: Contributing more than the maximum allowable amount to a spousal IRA can result in a 6% tax penalty on the excess contributions. The IRS allows you to correct this mistake by withdrawing the excess contributions before the tax filing deadline.
  • Age Restrictions and Withdrawal Rules: While there’s no age limit for contributing to either a traditional or Roth IRA, early withdrawals before age 59½ may incur penalties and taxes unless specific exceptions apply. Traditional IRAs are also subject to Required Minimum Distributions (RMDs) starting at age 73 (or 72 if you turned 72 before December 31, 2022), while Roth IRAs have no RMD requirements.

How to Open a Spousal IRA

Taking the First Steps

Opening a spousal IRA is a straightforward process:

  • Choose a Financial Institution or Brokerage Firm: Select a reputable financial institution or brokerage firm that offers IRAs. Consider factors such as fees and available investments.
  • Complete Necessary Paperwork: Provide personal identification, such as your name, Social Security number, and photo identification. You may also need to provide information about your household income to ensure compliance with IRS regulations.
  • Fund Your IRA: Connect a bank account to your spousal IRA and deposit your contributions. You can contribute your full annual limit at once or set up monthly contributions. Ensure that your contributions do not exceed your household’s taxable income or the IRS contribution limits.
  • Direct Your Investments: Decide how to invest your contributions within your spousal IRA. Options include individual stocks, bonds, mutual funds, and exchange-traded funds (ETFs). Building a diversified portfolio aligned with your financial goals is essential.

Managing a Spousal IRA

After opening your spousal IRA, effective management is crucial. Consider the following:

  • Investment Selection: Building a retirement portfolio can be complex, but tools like mutual funds and ETFs can help create diversified investments. Alternatively, you can choose a target-date fund or opt for a robo-advisor to simplify your investment choices.
  • Long-Term Planning: As you progress through different life stages and approach retirement, adjust your investments to align with your goals and time horizon. Remember that your spousal IRA is part of your overall financial plan.
  • Beneficiary Designation: Ensure you’ve designated beneficiaries for both your spousal IRA and your spouse’s retirement accounts. This step guarantees seamless asset transfer in case of unforeseen circumstances.

Conclusion

Empower Your Retirement Journey

Spousal IRAs are invaluable tools for non-income-earning spouses looking to secure their financial future. By understanding the rules, eligibility criteria, and contribution limits, you can harness the full potential of a spousal IRA. Remember to consider how this account fits into your overall financial plan and choose investments that align with your retirement goals. With a spousal IRA, you can take control of your retirement savings and enjoy peace of mind about your financial future. Start planning today!

 

Contact Information:
Email: [email protected]
Phone: 3604642979

Bio:
After entering the financial services industry in 1994, it was a desire to guide people towards their financial independence that drove Aaron to start Steele Capital Management in 2013. Armed with an extensive background in financial planning and commercial banking coupled with a sincere passion for helping people, Aaron has the expertise and affinity for serving the unique needs of those in transition. Clients benefit from his objective financial solutions and education aligned solely with
helping them pursue the most comfortable financial life possible.

Born in Olympia, Washington, Aaron spent much of his childhood in Denver, Colorado. An area outside of Phoenix, Arizona, known as the East Valley, occupies a special place in Aaron’s heart. It is where he graduated from Arizona State University with a Bachelor of Science degree in Business Administration, started a family, and advanced his professional career.

Having now returned to his hometown of Olympia, and with the days of coaching his sons football and baseball teams behind him, he now has time to pursue his civic passions. Aaron is proud to serve on the Board of Regents Leadership for Thurston County as the Secretary and Treasurer for the Morningside area. His past affiliations include the West Olympia Rotary and has served on various committees for organizations throughout his community.

Aaron and his beautiful wife, Holly, a Registered Nurse, consider their greatest accomplishment having raised Thomas and Tate, their two intelligent and motivated sons. Their oldest son Tate is following in his father’s entrepreneurial footsteps and currently attends the Carson College of Business at Washington State University. Their beloved youngest son, Thomas, is a student at Olympia High School.

Focused on helping veterans and their families navigate the maze of long-term care solutions, Aaron specializes in customized strategies to avoid the financial crisis that care related expenses can create. Experience has shown him that many seniors are not prepared for the economic transition that takes place as they reach an advanced age.

With support from the American Academy of Benefit Planners – an organization with expertise and resources on the intricacies of government benefits – he helps clients close the gap between the cost of care and their income while protecting their assets from depletion.

Aaron can help you and your family to create, preserve and protect your legacy.

That’s making a difference.

Disclosure:
Investment advisory services are offered through BWM Advisory, LLC (BWM). BWM is registered as an Investment Advisor located in Scottsdale, Arizona, and only conducts business in states where it is properly licensed, notice has been filed, or is excluded from notice filing requirements. This information is not a complete analysis of the topic(s) discussed, is general in nature, and is not personalized investment advice. Nothing in this article is intended to be investment advice. There are risks involved with investing which may include (but are not limited to) market fluctuations and possible loss of principal value. Carefully consider the risks and possible consequences involved prior to making any investment decision. You should consult a professional tax or investment advisor regarding tax and investment implications before taking any investment actions or implementing any investment strategies.

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Aaron Steele

After entering the financial services industry in 1994, it was a desire to guide people towards their financial independence that drove Aaron to start Steele Capital Management in 2013. Armed with an extensive background in financial planning and commercial banking coupled with a sincere passion for helping people, Aaron has the expertise and affinity for serving the unique needs of those in transition. Clients benefit from his objective financial solutions and education aligned solely with helping them pursue the most comfortable financial life possible. Born in Olympia, Washington, Aaron spent much of his childhood in Denver, Colorado. An area outside of Phoenix, Arizona, known as the East Valley, occupies a special place in Aaron’s heart. It is where he graduated from Arizona State University with a Bachelor of Science degree in Business Administration, started a family, and advanced his professional career. Having now returned to his hometown of Olympia, and with the days of coaching his sons football and baseball teams behind him, he now has time to pursue his civic passions. Aaron is proud to serve on the Board of Regents Leadership for Thurston County as the Secretary and Treasurer for the Morningside area. His past affiliations include the West Olympia Rotary and has served on various committees for organizations throughout his community. Aaron and his beautiful wife, Holly, a Registered Nurse, consider their greatest accomplishment having raised Thomas and Tate, their two intelligent and motivated sons. Their oldest son Tate is following in his father’s entrepreneurial footsteps and currently attends the Carson College of Business at Washington State University. Their beloved youngest son, Thomas, is a student at Olympia High School. Focused on helping veterans and their families navigate the maze of long-term care solutions, Aaron specializes in customized strategies to avoid the financial crisis that care related expenses can create. Experience has shown him that many seniors are not prepared for the economic transition that takes place as they reach an advanced age. With support from the American Academy of Benefit Planners – an organization with expertise and resources on the intricacies of government benefits – he helps clients close the gap between the cost of care and their income while protecting their assets from depletion. Aaron can help you and your family to create, preserve and protect your legacy. That’s making a difference.

Get the FREE E-Book

At Certified Safe Money, we empower you with valuable resources to make informed decisions for your retirement goals. We believe knowledge is the key to unlocking a secure future. Explore our current e-books and equip yourself with the insights you need to plan for the retirement you deserve.

At Certified Safe Money, we empower you with valuable resources to make informed decisions for

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