The Spousal IRA: the Retirement Account Every Full-Time Parent Needs

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I'm Nicole Lappin, the only financial expert you don't need a dictionary to understand.

It's time for some money rehab.

There are some retirement accounts, like a 401k, for example, that you can only get if you're employed.

So where does that leave you if you are a full-time parent or a homemaker?

Totally out of luck?

Luckily, no.

And today, I'm going to unpack the retirement account that you should have if you are not making income.

And if you know someone in your life who's a full-time parent or the CEO of the household, shoot them a link to this episode because I am always surprised by how few people know this option exists.

I'll cut right to the chase.

The retirement account that non-working spouses need to make sure they have is called a spousal IRA.

Quick side note here, in this episode, I'm going to be saying working spouse and non-working spouse, but let me be crystal clear.

Of course, someone who is a full-time parent is working.

I am trying to parent my dog, Penny, not even a human, and it still feels like a full-time job.

But non-working and working is just the term that you're going to see used by financial institutions.

So I'm just going to roll with it here.

A spousal IRA allows a working spouse to make contributions to an IRA on behalf of a non-working spouse.

This way, a spouse without income can still reap the rewards of a special retirement vehicle.

A spousal IRA can be set up as a traditional IRA or a Roth IRA.

And as a reminder, a traditional IRA is a pre-tax account.

So meaning the money in a traditional IRA grows tax deferred.

You're not going to pay taxes on those gains until you start taking distributions out when you retire.

This can be a good option if you expect to be in a lower tax bracket in retirement than you are now.

In contrast, a Roth IRA is a post-tax account, meaning your money grows tax-free and qualified withdrawals in retirement, also tax-free.

You already paid the taxes.

This can be beneficial if you expect to be in a higher tax bracket in retirement or if you just prefer the security of knowing that all of your withdrawals are not going to be taxed.

Espousal IRA has the same contribution limits as any other traditional or Roth IRA, which in 2024 is seven grand if you're under 50.

For folks 50 years or older, the IRS allows additional contributions to IRAs known as catch-up contributions.

The contribution limits change, but in 2024, the catch-up contribution allows you to make an extra thousand bucks as a contribution.

This means you can contribute up to eight grand annually if you are in your 50s 50s or older, which will help bolster your retirement savings as you approach retirement age.

There's also an earned income requirement, which dictates that the working spouse needs to have enough earned income to cover both their contributions and the contributions to the spousal IRA.

So for example, if you both aim to max out your IRAs at 7K each, the working spouse needs to earn at least 14K.

Funding a spousal IRA is really straightforward.

It can be boiled down into three steps.

Number one, select the right account.

You and your spouse will need to dictate whether a traditional or rough IRA is better for your financial situation.

Consider consulting with a financial advisor to make an informed choice.

Number two, make regular contributions.

Set up regular contributions to ensure the account grows steadily.

This can often be automated through your bank or your brokerage account.

Number three, allocate investments.

A common mistake people make when they open up their IRAs is thinking that once they've opened up that account, their job is done.

But just opening the account is not enough.

You need to allocate the investments within that IRA.

That means choosing how to invest the money, whether in stocks or bonds or other assets.

And if you're not married yet, I'd actually add one more step even before step one, which is to include a spousal IRA in your prenup.

I'll even give you some language here.

Try something like, in recognition of our mutual commitment to securing a stable financial future, the working spouse agrees to establish and make regular contributions to a spousal IRA for the benefit of the non-working spouse.

This arrangement aims aims to ensure equitable retirement savings and financial security for both parties.

Boom.

These steps aren't that complicated, but the feelings around them can be.

So let's try to untangle those feels.

A non-working spouse might feel guilty about their husband or their wife funding their retirement account or feelings of inadequacy for not contributing themselves.

But we need to shut those feelings down, ASAP.

You guys are going to live happily ever after, right?

You're going to live out your retirement days in notebook style.

You're going to die together in the same bed on the same breath in your old old age.

So by contributing to a spousal IRA, your spouse is actually doubling the retirement nest egg that you two will presumably be sharing in retirement.

So instead of only being able to have 7K growing tax-free in a Roth IRA, for example, your spouse can now have 14K growing tax-free between two Roth IRA accounts, all because of you.

But the best part is the spousal IRA has your name on it.

And I have seen many, many non-working spouses go through divorces and then have zero savings for retirement while the working spouse has a gigantic nest egg.

And that's just not fair.

So having a spousal IRA allows for a more equitable split where both spouses can move on with comfortable futures just in case of a non-notebook ending.

For today's tip, you can take straight to the bank.

If you're setting up a spousal IRA, make sure you also name a beneficiary.

This doesn't happen automatically, so you're going to need to set it up.

This will make sure that if you can't use your IRA for any reason, it won't fall into the hands of anyone except the person you want to have it.

Money Rehab is a production of Money News Network.

I'm your host, Nicole Lapin.

Money Rehab's executive producer is Morgan Lavoie.

Our researcher is Emily Holmes.

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Thank you for listening and for investing in yourself, which is the most important investment you can make.