What Is A Spousal IRA?
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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.
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.
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.