One of the most difficult situations associated with being a spouse who doesn’t work is the fact that you don’t have access to the 401(k) that your working spouse can contribute to. Without earned income, it’s hard to save for retirement down the road.
The good news is that it is possible for a stay-at-home spouse to save for retirement, and also boost your household's contributions to tax-advantaged retirement accounts. You can maximize your contributions as a couple with the help of a spousal IRA.
What is a spousal IRA? A spousal IRA is really just a regular IRA that your spouse can make contributions to on your behalf. Normally, in order to open an IRA, you need to have earned income. Rather than requiring earned income for non-working spouses, the IRS allows you to open an account and then have the working spouse make contributions to it. It’s possible to open a traditional IRA or a Roth IRA (as long as you meet eligibility requirements) under this arrangement.
Additionally, it’s important to note that the IRA is a completely separate account, set up in the non-working spouse’s name. This means that once a contribution is made to that IRA, it belongs entirely to the person who owns it, and not the person who made the contribution.
How you can benefit from a spousal IRA. The non-working spouse benefits from this arrangement by having assets that are entirely his or her own. For someone who has left the workforce to help raise a family, this can be a great benefit, since a non-working spouse gives up earning power and potential benefits.
As a couple, you can benefit by doubling your household contributions to an IRA. For 2013, the maximum contribution is $5,500. If the working spouse maxes out his or her IRA, and then makes another maximum contribution to the non-working spouse’s IRA, the household now has the ability to contribute $11,000 for the year.
If the contribution is to a traditional IRA, then the tax deduction has just become bigger. If the contribution is to a Roth IRA, then there is more money in the account earning interest on a tax-free basis. Either way, the benefit to the couple is increased with the help of a spousal IRA.
What about same-sex partners? The recent Supreme Court ruling on the Defense of Marriage Act makes it clear that the federal government has to recognize marriage if states do. This presents new opportunities for same-sex couples who were unable to make spousal contributions, even if legally married in their state of residence. Now, legally married same-sex couples should be able take advantage of spousal contributions – at least some of them.
However, there are questions that still need to be answered. It’s unclear what happens if a couple is legally married in one state, but moves to a state where same-sex marriage is illegal. It seems clear that if your state of residence recognizes your marriage, you can contribute to a spousal IRA. However, if you live in a state where your marriage isn’t recognized, there might be a problem. The IRS has yet to provide guidance on this issue.
Another difficulty that arises is the fact that not every state where same-sex unions are recognized calls the unions marriage. You might have a civil union or a recognized domestic partnership, but if that is not treated the same as a marriage it is unclear whether or not a spousal IRA is an option.
For many couples, spousal contributions to an IRA can be a great retirement planning boost. However, you want to make sure that you meet the eligibility requirements before you proceed.