Spousal Roth IRA

A spousal Roth IRA is the one exception to the Roth IRA contribution stipulation requiring earned income. A working spouse can effectively “give” income to their non-working partner, thus eliminating the requirement of earned income.

Couples need to file their taxes as married filing jointly, not married filing separately to qualify. In addition, the working spouse’s earned income for the year must meet or exceed the total amount of contributions to all IRAs by the couple for that year.

Types of Contributions

A spousal IRA can consist of traditional contributions, Roth contributions, or both. However, traditional and Roth contributions must be kept in separate accounts. This allows couples with one income source to save in up to four different accounts, diversifying how they save for retirement.

Let’s assume Roth IRA contribution limits for the year are $5,500 and our couple has one working spouse whose employer does not offer a retirement plan. They could contribute up to $11,000 that year: $5,500 in a Traditional IRA and/or Roth IRA for the working spouse, and $5,500 for the non-working spouse (Traditional, Roth, or a combination).

Spousal Roth IRA and other Retirement Plans

If the working spouse’s employer offers a retirement plan and the working spouse is a participant, the couple could save up to the limits of the retirement plan plus the $11,000 in IRA contributions. See Roth IRA vs 401k for details.

Roth IRA Switcheroo

What type of contribution(s) the couple would be allowed to make to their IRAs is determined by their modified adjusted gross income and the IRS income limits for the year. If you make too much money, you’ll have to perform what I like to call the ‘ole Roth IRA switcheroo.

You may think the Roth IRA switcheroo is a bit sneaky and underhanded – I know I did when the IRS rules first came about – but it’s legit and legal.

Back to Work

If the non-working spouse decides to go back to work, he or she won’t have to open up another Roth IRA to continue making Roth contributions (although they could if they wanted to). Contributions can be made directly to the same account containing the spousal contributions, and all money withdrawn will be 100% tax free (assuming qualified withdrawals are made).

In fact, there really is no such thing as a “spousal Roth IRA”; it’s just a Roth IRA. Whether you contribute money under the spousal Roth IRA rules or have income to support your own contribution is inconsequential. These two types of contributions – and their associated tax free earnings – are treated the same and can be commingled.

These types of contributions are especially helpful when a parent takes time off work to care for children. Contributions do not have to be curtailed. Remember, dollars you put in your Roth IRA early on will have a bigger bang for the buck than the ones invested later, so it’s best to continue to contribute, even if it’s just a few bucks.

Multiple Spousal Roth IRAs

You can have one or more Roth IRAs going at the same time. The IRS doesn’t care how many you have, as long as you make qualified contributions and don’t go over the contribution limit for the year, which are indexed for inflation and can change from year to year.

One reason you may want to have more than one account is to save on expenses. For instance, say both certificates of deposit and individual stocks are part of your Roth IRA investment plan. A local credit union may be your lowest cost choice for the Roth IRA cd investment, while a discount broker would be more affordable for buying and selling stocks.

Opening and Investing

It’s easy to open a Roth IRA. Pretty much any financial institution that offers investments will offer a Roth. You’ll then have access to most if not all of the financial products that company offers.

The Spousal Roth IRA Advantage

Double the amount you save into IRAs by using the spousal Roth IRA option. Assuming you plan on staying married, treat you and your spouse’s retirement plans as one big pot, and try and maximize your contributions into that pot each and every year.