Spousal IRA Lets Nonworking Spouse Save for Retirement

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When couples have children, they have to make some tough decisions. One of the most difficult is determining if one of the spouses will quit working and stay home with the children. Although more and more fathers are the ones staying home with the children, more often than not women fill that role.

As a financial adviser, I often speak with women who used to make good incomes while making retirement contributions to their employer's 401(k) or 403(b). Years later, after having children, they find themselves un-empowered financially while their husbands are the sole breadwinners. Their retirement accounts haven't grown much because they haven't been contributing to them since they stopped working.

The Spousal IRA is Underutilized

Investing for retirement on two incomes is hard enough, so most couples don't even consider an easy way to boost the couple's retirement assets when only one spouse works. It's called the Spousal individual retirement account, and most people are not even aware it exists.

A spousal IRA allows a working spouse to contribute to a nonworking spouse's retirement savings. Spousal IRAs can be either traditional or Roth and have the same annual contribution limits, income limits and catch-up contribution provisions as those do.

The couple must file a joint tax return. Total contributions for both the working and nonworking spouse cannot exceed $11,000 in 2015, if you are both under 50. If you are both 50 or over, then the maximum amount is $13,000. The working spouse must have sufficient earned income to fund both IRAs. If you haven't made your IRA contribution(s) for 2014, you have until April 15, 2015, to do so.

A Spousal IRA Empowers Women

The spousal account is held in the name of the nonworking spouse only, which allows him or her to choose a brokerage firm, make investment decisions and designate beneficiaries without requiring the signature (or consent) of the other spouse. If a nonworking spouse died during the marriage, the IRA funds would in most cases go directly to the beneficiaries, which may or may not include the spouse. IRA assets during divorce may be considered separate or community property, depending on the state and whether or not the couple has a pre- or post-nuptial agreement.

While I encourage couples to make investment decisions together, I also encourage women, in particular, to take charge and sole responsibility of a small account of their own so they can obtain valuable investing experience.

Although many financial advisers recommend the Roth IRA over the traditional IRA, in many cases I prefer the traditional, especially for couples who are in a high-tax bracket. Motley Fool contributor Dan Caplinger has three reasons why a Roth IRA might be less advantageous.

Spousal IRA owners who choose the traditional IRA face tests to determine how much of the contribution is deductible. The entire amount contributed to the spousal IRA is deductible if the working spouse's employer does not offer a workplace retirement plan. These days a lot of companies hire contract workers or require employees to work for up to a year before they are eligible to participate in the company's retirement plan.

If a spouse stays home with the kids for 10 years and contributes $5,500 per year into an IRA, depending on the investment mix and average annual return, it is possible that the account will be worth between $60,000 and 90,000 as the money compounds without money to pay taxes being extracted. That's the beauty of the IRA –- your money compounds either tax-deferred or tax-free.

Even if you don't have young children, if you are unemployed, you might benefit from the spousal IRA.

The information contained herein is strictly for educational and illustrative purposes, providing commentary, analysis, opinions and recommendations, and should not be considered investment advice for any specific subscriber or portfolio or an offer to sell or a solicitation to buy any security
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