My wife quit working when our kids were born. That is, she quit going to the office. Being a mom is definitely work.
But while she’s not gainfully employed, we still actively contribute to her retirement savings via a spousal IRA. And if you’re looking to turbocharge your retirement savings, this could be the right move for you too.
When you open an IRA account, you’ll generally have several checkboxes to choose from: Traditional, Roth, SEP, etc. There is no legal entity called a “spousal” IRA. It’s just a regular IRA that you open for a non-working spouse.
In order to contribute to an IRA or 401(k) plan, you have to have earned income.
But if you’re married and only one spouse is working, the working spouse can use their earned income to fund the retirement account of the non-working spouse so long as you file a joint tax return.
If You Have an IRA or 401(k)
Let’s play with the numbers. In this example, you’re working, and your spouse isn’t.
In 2020, you can contribute up to $6,000 to an IRA and another $6,000 for your spouse. The number bumps up to $7,000 for anyone 50 or older.
The deductibility of the contributions depends on whether you have access to a 401(k) plan at work. More on that later.
But the important point is that you don’t have to have a job to open an IRA. So long as your spouse does, you’re good to go.
If you’re in the 32% tax bracket, contributing $12,000 for yourself and your spouse amounts to a $3,840 tax break.
If you have access to a 401(k) or similar plan at work, it gets a little more complicated.
Your ability to write off your IRA contribution — including your spousal IRA contribution — starts to phase out.
If your combined adjusted gross income (AGI) as calculated on your tax return is greater than $101,000, your deduction phases out and is eliminated altogether at an AGI of $121,000 or greater.
That doesn’t make a traditional IRA contribution worthless, however. While you would get no current-year deduction, you’d still benefit from years of tax-free dividends, interest and capital gains.
Consider a Spousal Roth IRA
Depending on your income levels, a spousal Roth IRA might also be an option. In a Roth IRA, you get no current-year tax break. But you enjoy tax-free investment returns. And, when you take the money out to cover living expenses in retirement, you won’t have to pay income taxes.
For 2020, a married couple filing jointly with a modified adjusted gross income (MAGI) of up to $196,000 is eligible to max out their Roth IRAs.
After $196,000, it starts to phase out. At $206,000, it gets eliminated altogether.
Takeaway: If your choice is between a non-deductible traditional IRA and a Roth IRA, the Roth is the clear choice. But if you have the high-quality problem of making too much money to qualify for a Roth, a non-deductible traditional IRA is the next best thing.
If You’re Self-Employed
Everything we’ve covered so far assumes that you work for a paycheck. But if you own a business, things get more interesting. You can hire your spouse and potentially put back thousands of additional dollars tax-free.
I’ll explain with an example. I had a friend from college who went on to be a successful romance novelist. At her peak, she was making millions of dollars per year.
Her husband supported her career by helping to run the household and taking care of their kids while she was promoting her books. But he also did some administrative work and helped with the bookkeeping.
For his efforts, she paid him a little over $250,000 per year, which was enough at the time to max out a SEP IRA at $50,000. (The limit is $57,000 as of 2020.)
Those kinds of numbers might not be realistic at your current income level.
But regardless, if you’ve maxed out the available retirement plan options, there are plenty of ways to get additional retirement savings in your spouse’s name.
The spousal IRA or Roth IRA are the easiest and most straightforward.
But if you’re self-employed, hiring your spouse, paying them well and then dumping a ton of the cash into a retirement plan is a solid option.
Money & Markets contributor Charles Sizemore specializes in income and retirement topics. Charles is a regular on The Bull & The Bear podcast. He is also a frequent guest on CNBC, Bloomberg and Fox Business.
Follow Charles on Twitter @CharlesSizemore.