Family Finance: Save Smart with a Spousal IRA

Denise Trowbridge

It's April, which means you've probably joyfully and dutifully filed your income tax return. OK, maybe not joyfully.

While taxes are fresh on your mind, I'd like to urge you to pretty pretty please take advantage of a spousal IRA. It's an Individual Retirement Account for a married partner who either stays at home or works but isn't covered by a 401(k) or another employee-sponsored retirement plan.

A spousal IRA is basically the same as a regular IRA, except that you don't need to earn your own money to contribute. Instead, the working partner's earned income funds the account. Essentially, it allows nonworking, caregiving spouses (I'm talking to you, stay-at-home moms and dads) to invest for retirement during the years they are out of the workforce.

Those who are eligible can open an account now and reap the benefits on next year's tax return. It also will significantly boost your nest egg for retirement. And given that women, on average, live longer than men and need more money to see them through their golden years, you're going to need that extra dough in your dotage.

Chew on this: If you begin at age 40 and contribute $2,000 each year until age 65 in a spousal IRA with a 5 percent return, you'll have a little more than $100,000 saved for retirement. Here's a handy calculator if you'd like to run the

Like IRAs and 401(k) accounts, a spousal IRA is set up in one partner's name and legally belongs to that person. To contribute, you must be married and file taxes jointly. You can save up to $5,500 each year, or up to $6,500 for those 50 and older. Don't be put off if these numbers seem huge. They're the maximums. Any amount invested is better than saving nothing at all.

For investors who don't already have a relationship with a brokerage, low-fee and low-minimum-deposit IRAs are widely available. They can be opened at many local banks and through brokerages such as E*Trade, Charles Schwab, Vanguard and TD Ameritrade. If you already have an IRA, perhaps from a past job or a 401(k) rollover, you can make spousal IRA contributions to that account.

Investors can choose a traditional or Roth IRA—or a combination of both, as long as total contributions don't exceed $5,500—for the spousal account. Remember, contributions to a traditional IRA are tax-deductible. You invest pretax dollars, but must pay income taxes on the money when it is withdrawn. A Roth IRA doesn't have an upfront tax deduction. The account holder pays income taxes on that money now, but not on withdrawals. Roth savings also can be used to pay for college, usually without penalties. Investments in both accounts grow tax-free.

Of course, there is some fine print.

The working spouse must earn at least as much as he or she contributes to all household IRAs. For instance, if a husband saves $10,000 total between his IRA and his spouse's, he must have earned more than $10,000 that year.

If a part-time working wife participates in a retirement savings plan at work, she likely can't fully deduct contributions to a spousal IRA.

Also, if the working partner participates in a 401(k) or retirement plan at workand your household's adjusted gross income is less than $184,000, “you can deduct all of the $5,500 traditional IRA contribution” on your taxes, said Brad Huffman, a Certified Financial Planner with Future Finances in Worthington.

If you earn more than $194,000, sorry. No deduction for you.

“Most tax software will help you figure this out,” Huffman said. “You simply tell it you want to maximize contributions, and it should tell you what is viable.”

If you need more information about spousal IRAs and think government documents are fun, read the IRS rules about IRA contributions

Denise Trowbridge is a self-professed money geek who writes about personal finance, banking and insurance. Follow her on Twitter at @DeniseTrowbridg.