One of the things I love about contributing to my Roth IRA is that my earnings will grow tax-free, since contributions are made with after-tax income. One thing I dislike about my Roth IRA is that I am limited in the amount I can contribute. (There are the same contribution limits on a Traditional IRA.) For years, I have just contributed to my Roth IRA, and decided that, when my husband finished school and got a job, we'd open a 401k through whatever organization he was working with. However, what I should have been doing the last few years was contributing to a spousal IRA for my husband, so that we could be that much ahead for retirement.
What is a Spousal IRA?
In reality, a spousal IRA is just a “regular” IRA. Technically, what you are doing is making a spousal contribution to an IRA for a non-working spouse. This ability was created in recognition of the fact that there are a number of single-income households. What if a non-working spouse wanted a retirement account? The rules of the IRA require that contributions be made from earned income. However, in a single-income household, the staty-at-home partner does not have earned income. He or she is contributing in a meaningful way to the family, but the contribution isn't recognized by monetary compensation.
In order to provide a way for a non-working spouse to grow a nest egg, it is allowable for a working spouse to contribute some of his or her earned income to an IRA. It is important to note that a spousal IRA must be set up in the non-working partner's name. This means that the assets in it belong to that person. Once the working partner contributes the money, it is no longer in his or her control. For the most part, this doesn't matter, since you will presumably be together for the rest of your lives. But it is something you need to be aware of in the event of a divorce.
Advantages of the Spousal IRA
Clearly, one of the greatest advantages to the spousal IRA is that your partner can build up a retirement account. This provides your spouse with a measure of financial security that he or she deserves — especially since some of his or her financial potential is reduced due to the decision to take care of home and children.
The other advantage is that, as a couple, your ability to contribute to an IRA is doubled. If you like the Roth IRA idea, this can be especially beneficial. You are provided with a way to make twice the amount in contributions that will grow tax-free to your mutual benefit. When considering long-term retirement planning, a spousal IRA can be a smart decision. Instead of being limited to $5,000 in contributions for 2011, your household could contribute $10,000: $5,000 for you, and $5,000 for your spouse. This is a big improvement, and one that could make a huge difference when it comes time to retire.
Carefully consider your options and retirement goals, and then decide if you could benefit from a spousal IRA.
The contributions rise to $6000 per person ($12,000 per couple) for those 50 and over. Whether $10,000 or $12,000, that’s a sizable contribution especially if you have no other retirement plans. You can split the contributions between a tradional IRA and a Roth IRA, but the contributions to the two cannot exceed the limits for one type of account. (If you both contribute, your maximum is $10,000, with say, $5000 for a traditional IRA and $5000 for the Roth).
Having both provides tax diversification since the Roth will not add to your tax liability at retirement, nor will it require distributions. You can have a good bit of diversification just by having IRAs.