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What Is A Spousal IRA?
When one thinks of investing, images of bustling stock markets and individual stocks might come to mind. But when it comes to building a nest egg for retirement, there's an underrated hero in the realm of financial decisions – the Spousal IRA. If you're part of a married couple where one spouse works and the other might be a stay-at-home parent or earning little income, this article is for you.
Understanding the Spousal IRA
At its core, a Spousal IRA is an individual retirement account (IRA) that allows a working spouse to contribute to an IRA in the name of a non-working spouse. This is a great way to bolster the retirement savings of both partners, even if only one has earned income in a given tax year.
Traditional IRA vs. Spousal IRA
You might be thinking, “Isn't an IRA a solo endeavor?” Typically, yes. A regular IRA is built around the earnings of an individual. The catch here is that with a Spousal IRA, the employed spouse can make contributions to their own IRA and to an IRA in the name of the non-working spouse. This is where the magic of the Spousal IRA contribution plays out, ensuring that both partners can grow their retirement savings.
How Does It Work?
1. Income Requirements: First, there needs to be taxable compensation. This means one spouse must have earned income. The combined total contributions to both the working and non-working spouse’s IRA must not exceed this amount.
2. Contribution Limits: For the tax year 2023, under current law, the annual contribution limits for an IRA are $6,000. If you're above 50, catch-up contribution provisions allow an additional $1,000. Thus, a couple could contribute a maximum amount of $12,000 or $14,000 if both are 50 or older.
3. Roth vs. Traditional: The type of IRA - Roth or Traditional - where the spousal contributions go, can vary. Spousal Roth IRA contributions have phase-out ranges based on the household income, and income limits determine if you can contribute. Traditional IRA contribution may offer a tax deduction, but it's contingent on various factors like whether the working spouse is an active participant in an employer-sponsored retirement plan.
Benefits of a Spousal IRA
Tax Benefits: With a traditional IRA, your contributions might be deductible, reducing your taxable income for the year. Roth IRA contributions, made with after-tax dollars, grow tax-free, which can be beneficial in the back end.
Flexibility: The funds in an IRA can be invested in various assets – from mutual funds to individual stocks, depending on the financial institution, like a bank or credit union, where the IRA is held.
Potential Limitations
The only limitation is that the joint tax return must be filed by the couple. A joint account or a joint IRA isn't necessary, and the Spousal IRA must be opened in the own name of the non-working spouse.
Seek Expert Guidance
While the information provided aims to guide for educational purposes, it's essential to seek specific advice tailored to your investment objectives. A financial planner or advisor can provide investment advice, helping you navigate IRA contribution limits, asset allocation, and specific investments suited to your goals.
Closing Thoughts
An IRA is more than just a tax-favored retirement plan; it’s an acknowledgment of mutual growth, especially when it comes to a Spousal IRA. It’s a nod to the stay-at-home spouse, recognizing the invaluable contribution they make to the household. The past performance of investments shouldn’t be the only indicator for future success; it’s the financial decisions we make today that pave the path for a comfortable tomorrow. Ensure you make the most of such provisions and, if in doubt, always consult a financial advisor before making any decisions.
