Spousal IRA For Stay At Home Moms

I currently receive a healthy employer contribution into my retirement plan, and have considered opening a Roth IRA before adding any of my own contributions to the retirement plan at work. While investigating brokerages, investment minimums, etc. I ran across the term “Spousal IRA.” I had heard this term tossed around before, but never really taken the time to read up on the rules. Apparently, non-working spouses are eligible to use a portion of their working spouse’s income to fund their own Roth IRA. Before starting my own Roth IRA I think we’ll start one for my wife, and we’ll use her account to further diversify our overall portfolio.

Eligibility

Spousal Roth IRA contributions can be made to either a Traditional or Roth IRA. Even though they don’t offer the same upfront tax deductions as the Traditional model, we’ve elected to invest in Roth IRAs because the earnings grow tax free. The limits for contributing to a spousal Roth IRA are the same as those listed for individual investors – $5,000 per tax year if under age 50, and $6,000 for those 50 and older. The following income limits also apply:

  • For married filing jointly — $169,000 modified adjusted gross income for tax year 2008
  • For married filing separately — $10,000 modified adjusted gross income for tax year 2008.

We shouldn’t have to worry about the $169,000 combined income any time soon, although that would be a great problem to have!

Diversify Your Strategy

My wife and I agreed we would take a more conservative approach with her investment selections, sticking to well-diversified mutual funds aimed at both capital preservation and appreciation. I’m the risk taker in the family when it comes to investing, but at the age of 30 I can afford to take some risks. I don’t mean to imply my wife is older (in fact, we are the same age), but if I were to kick the bucket she would need to preserve the proceeds from insurance and investments for as long as possible. It makes sense to us to lay the foundation for such a plan now while I’m still around. While the proceeds would be invested outside of retirement accounts, her strategy would be much the same.

Inside my employer’s retirement plan I’ve selected an aggressive portfolio from the mutual funds available. To offset some of this risk, my wife’s spousal Roth IRA will be comprised of less-risky mutual funds, a few of which offer a balanced mix of equities, bonds and other fixed-value investments. In times of market expansion my employer plan will likely grow much faster than her Roth IRA will. But in rough times, while my balances are falling, her Roth IRA should hold much of its value in tact. This seems to be a good way to hedge against market fluctuations over the next couple decades.

Max out your contributions for both you and your spouse, if possible. Remember, Roth IRA withdrawal rules allow for the withdrawal of contributions at any time, without penalty or taxation. This lessens the worry of locking away your money in a retirement account without access until retirement age. But remember, it’s best to leave the money in your Roth IRA unless you really need it in an emergency.

What’s Mine is Hers; What’s Hers is Hers

Sorry, I couldn’t resist the joke. Actually, my wife and I pool all of our earnings together and consider any savings, investments, and debt to be both of ours, as it should be. I’ve never liked the idea of separate finances, unless you have a situation where older couples remarry and both have their own set of income and expenses. Even then, why not just share everything. After all, isn’t marriage the ultimate partnership?

Comments

  1. When I became a stay at home mom I was worried about my Roth. I knew that it needed to be funded with “earned income” and I didn’t have any earned income. I knew about spousal IRAs and I thought I had to do something to my existing IRA to make it a spousal, but when I called they said I didn’t have to do a thing, as long as you are married any IRA could be a spousal with no changes.

  2. I’m with you on merging finances. It’s definitely a personal decision, but combining accounts goes a long way to making us work and feel like a team. In that light, a spousal IRA is just one more way to add to “your” (meaning you *and* your wife) nest egg. Good find.

  3. We have two ROTH IRA’s, one for me and one for my wife. Since my wife is a stay at home mom, we have the option to fund it as a Spousal IRA, and actively do so. Every month we invest 15% of our gross pay into our various retirement accounts (some goes to my companies 401K to take advantage of the company match, the rest goes to our ROTH IRAs.

  4. Roth IRA are a great saving vehicle, regardless if you intend all of it for retirement or not. Interest from normal avings is taxed at the same tax level as income, not the 15% tax level for dividends etc., which is a shame, because the interest is more compensation for inflation than it is income. Interest from a Roth is not taxed, but you have to use it for your retirement (or pay 10% penalty), which is fine with me, after all, we should save for our old age anyhow.

    Contributions to Roths can be withdrawn anytime without penalty, e.g. in any emergency. Two caveats though: Withdrawn contributions cannot be redeposited and, therefore, won’t earn more compound interest for retirement, and the Roth shouldn’t be your first emergency fund, but behind a smaller fund with expenses for one or two months.

    I agree that earnings, savings and expenses within a marriage should be merged, with two exceptions: property and debt from times before the marriage are not merged, and neither are inheritances, which are personal.

  5. I forgot to add: Yes, we use fully fundede Roths for me and my wife to save, for emergencies, downpayment, and retirement.

  6. I had no idea they existed until Ciaran did a guest post about them on my blog (or rather, I found out and then asked him). Apparently my mom has one…which was a good choice for her. She’d worked before we were born, but spent a good 18 years not earning much money which could be used for retirement.

    If I ever become a SAHM/SAHP, I’ll definitely look into this. I’ll probably also try to earn a little money on the side for a Roth.

  7. Women aren’t the only ones that stay at home.

    DH returned to school and I fully fund his IRA, because retirement savings doesn’t take a break for life changes!

  8. I remember my husband’s previous employer’s retirement plans had a funny clause that if he died I would only receive half of the proceeds from his retirement account. I’m not sure if this is common, but what a blow that would be. A spousal IRA certainly sounds like a good idea.

  9. I have been a stay-at-home mom for a little over a year with our 3rd child. My husband makes a weekly contribution to my Roth IRA, in addition to his own Roth. I also have a traditional IRA that used to be a SIMPLE when I owned my own business. According to our accountant, I cannot contribute to that without earning some sort of a taxable income. Any money I do earn goes right into that IRA.

    • @HMB: It’s my understanding that once you have maxed out either type of IRA (Roth or Traditional) you may not contribute to the other. You technically can contribute to both types of IRAs in a tax year, but the combined contributions to both cannot exceed the limit for that particular year. Don’t take my word for it though, check out the IRS website to be sure.

  10. I have heard of this, but haven’t explored opening one yet. Thanks for the inspiration to explore this option for our family.

  11. Insight into the older 2nd marriages and separate finances…… Sometimes it’s because of the kids… things just tend to go smoother within the family when you are working with 2 separate sets of grown kids and grandkids if you keep things separate. Hubby’s kids get his stuff and wife’s kids get her stuff at death… having joint accounts for the everyday stuff that both contribute to works for the living expenses. Just tends to keep harmony in the family better. And if the family is happy, then the couple can be happier :) And no one gets accused of being a gold digger.

    Each situation is different, of course.

  12. It takes a little more time and commitment, but I fund my wife’s Roth IRA over the course of the year. I don’t use automatic investments though. I split up the contributions into 5-6 investments. Since I put the money into index funds or other mutual funds heavily weighted to equities, I wait to contribute on the days that the stock market is down big. On those given days, I wire the money from my account and buy the mutual fund. Mutual funds will execute at the NAV at the end of the day. In this manner, we take advantage of the swings in the market and get extra returns that we would not normally get by just doing an automatic account builder…

  13. My wife and I opened a Roth for her and I don’t even think there was a distinction made whether or not it was ‘spousal’ Anyway, a great investment vehicle. Even better is a self directed IRA with which you buy real estate and all gains stay under the IRA umbrella. I can’t wait to start utilizing that vehicle.

  14. I guess I’m not clear on the advantages of having a spousal Roth IRA. Not that I don’t understand the concept of the Roth IRA– I had one myself.

    Is the benefit simply that you can sock more money away so that this would be an “advanced” retirement step?

    Is it something that you consider when you don’t have access to a 401K plan and you’re trying to maximize retirement?

    I’ve got up to 20% 401K at my work, and I’m only contributing 1%– planning to bring it up. What’s the benefit to me of having a Roth for my spouse as well?

  15. The IRA maximum contribution per year is the sum of the contributions to your Roth and Traditional IRAs, I believe. Once you have maxed out your Roth IRA, you cannot contribute to another IRA. It doesn’t concern me personally, because I save for retirement through a 401k, which is separate from IRAs, and use our Roths as emergency funds and tax diversification. People without 401k, however, should carefully plan their retirement savings. Another advantage of a Roth: The maximum annual contribution is the same as for a Traditional IRA, but that money is already taxed, so the 5000 dollars on a Roth are effectively more worth to you than 5000 dollars on a Traditional IRA.

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