Spousal IRA

Making the most of your marriage

In households where one spouse doesn't work, there is an opportunity to contribute to a retirement plan despite not having any earned income. This can dramatically increase the amount of funds available at retirement that would not have been available otherwise. This is a good example of the federal government introducing legislation to assist Americans with their retirement savings.

How does this work?

The spouse who is working opens an IRA account in the other's name and social security number. The two must be legally married and the earning spouse must have income of no more than $160,000. The two of you must file a joint tax return and you must be 70½ years of age or less and able to open a traditional or Roth IRA

If your working spouse has maximized his or her IRA contribution but has additional funds available to put towards your retirement, to use a traditional IRA will cost $3,500 in net after-tax dollars on a $5,000 contribution. That's a $1,500 benefit every year without taking into consideration the tax-deferred growth of assets. If you opened a Roth IRA instead of a traditional IRA, you would get tax-deferred growth on the assets and pay no taxes on withdrawals at retirement, but the contributions would not be deductible.

If on the other hand you did neither and opened an investment account with zero tax benefits, your after-tax cost on the investment would be $5,000 - not to mention there would be no tax-deferred growth of your contributions. The difference in capital at retirement would be substantial.

Take advantage of every tax benefit available to grow your retirement nest egg. If your spouse isn't working but you can contribute to a traditional IRA on his or her behalf, you should do so before putting any additional funds into any fully taxed investment accounts. The long-term benefits of tax-deferred compounding are far greater than picking the best stocks or mutual funds. That said, it's important to keep in mind that any tax savings as a result of an investment are fantastic but shouldn't persuade you to invest in something you normally wouldn't.

The government gives both spouses the opportunity to save additional funds for retirement despite the fact one of you isn't working. This is an opportunity to let your marriage work for you rather than against you. Don't waste it.

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