Retirement planning isn't something you do alone. It's important for couples to plan and prepare together. So, how can a spouse with no income save for retirement? The answer lies in the Spousal IRA.
What is a Spousal IRA?
A Spousal IRA allows a working spouse to contribute to an Individual Retirement Account (IRA) on behalf of a non-working spouse. This can be set up as either a Traditional IRA or a Roth IRA, and the couple must file a joint tax return. This account enables the non-working spouse to save for retirement.
Attractive Benefits of a Spousal IRA
1. Maximizing Retirement Savings:
With a Spousal IRA, couples can contribute to IRAs in both names. As of 2024, each spouse can contribute up to $7,000 annually, with an additional $1,000 catch-up contribution allowed for those aged 50 and above.
2. Tax Benefits:
Contributions to a Traditional IRA may be tax-deductible, reducing your current tax burden. For a Roth IRA, contributions are not tax-deductible, but withdrawals during retirement are tax-free.
3. Financial Independence:
A Spousal IRA is opened in the name of the non-working spouse, allowing them to have their own retirement account. This helps maintain financial independence.
4. Diverse Investment Options:
A Spousal IRA offers a variety of investment options. You can invest in stocks, bonds, mutual funds, ETFs, and more, diversifying your portfolio and maximizing potential returns.
How to Set Up a Spousal IRA
1. Open an Account:
Open a Traditional IRA or Roth IRA in the name of the non-working spouse. If an account already exists, you can contribute to it.
2. File Joint Tax Returns:
To contribute to a Spousal IRA, the couple must file a joint tax return.
3. Make Contributions:
The working spouse makes contributions to both IRAs. Contributions cannot exceed the working spouse's income.
Detailed Benefits and Considerations
1. Long-Term Growth Potential:
Consistent contributions to a Spousal IRA can significantly enhance retirement savings over time. For example, contributing $7,000 annually with an average annual return of 7% could grow to over $307,000 in 20 years.
2. Flexibility in Tax Treatment:
Traditional IRAs offer tax-deferred growth, meaning you pay taxes upon withdrawal, which can be beneficial if you expect to be in a lower tax bracket during retirement. Roth IRAs, on the other hand, provide tax-free growth and withdrawals, which can be advantageous if you expect to be in a higher tax bracket later.
3. Catch-Up Contributions:
For those aged 50 and above, the catch-up contribution allows an additional $1,000 per year, helping to boost retirement savings as you approach retirement age.
4. Required Minimum Distributions (RMDs):
Traditional IRAs require you to start taking distributions at age 73, which are taxed as ordinary income. Roth IRAs do not have RMDs during the account holder's lifetime, providing more flexibility in managing your retirement funds.
5. Protection in Divorce:
The Spousal IRA is owned by the non-working spouse, ensuring that they retain control over the account even in the event of a divorce.
A Spousal IRA can be a powerful tool for couples preparing for retirement together. It helps the non-working spouse save for retirement, offers tax benefits, and provides various investment options for financial stability.
Start preparing for a better retirement with your spouse through a Spousal IRA today!
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