We opened a spousal Roth IRA in my wife’s name in 2013 and contributed $5,500 to both her’s and my Roth that year. We’ll continue to contribute the full amount to both of our IRA’s every year going forward, as long as we don’t hit any income limits.
Mrs. RBD works her ass off as a full-time stay-at-home Mom, but that work does not bring in any income. Despite the very important and challenging work she does at all hours of every day, the Internal Revenue Service (IRS) considers her a non-working spouse.
Though she doesn’t have an income, the law still allows her to make contributions to an IRA. This is made possible by a law called the Kay Bailey Hutchison Spousal IRA.
I’m not usually one for paying tribute to politicians, but here’s somebody that actually did something to help savers.
Spousal Roth IRA Background
The Spousal IRA was signed into law with the Small Business Job Protection Act of 1996. The subsection of the Internal Revenue Code (26 U.S. Code § 219 – Retirement Savings) was originally called “Special Rules for Certain Married Individuals”. Before the law, a non-working spouse could not contribute to an IRA.
The 1996 update to the rules was spearheaded by Kay Bailey Hutchison because she realized the need for change through personal experience. In July 2013, the law was renamed the Kay Bailey Hutchison Spousal IRA in her honor. Upon the renaming of the bill, she offered these words:
I authored the bill, cosponsored by Sen. Barbara Mikulski, to establish the Spousal IRA. It came from an experience I had when I opened an IRA as a single woman. When I married and was not working, I was unable to make a full contribution because the law did not allow spouses who work inside the home the opportunity to establish full IRAs. Every working person or homemaker spouse should have the equal opportunity to establish retirement security through an Individual Retirement Account. I urge every young person to start this tax deferred savings opportunity when they enter the workforce in their 20s to get the full benefits of compound interest.
Powerful Early Retirement Tool
During research for a previous post about using the Roth IRA to help with early retirement, I learned more about what kind of advantages the Roth IRA gives an early retiree. It is a powerful tool because after-tax money is contributed to the account and grows tax-free, and withdrawals can be made tax-free upon reaching the age of 59 ½. But what is even more handy for the early retiree, contributions to the account can be withdrawn at any time without penalty.
For example, if during the next ten years I contribute $5,500 per year to my account, that $55,000 can be taken out tax-free and penalty-free when I’m 49 or whenever. However, the earnings in the account must remain to avoid taxes and penalties. This is ideal for saving because that cash earns money tax-free through dividends and capital gains from stocks, but is still accessible if an early retirement goal is met before age 59 ½, or even if the cash is needed for an emergency or other use.
When I run a quick spreadsheet calculation of this simplified example using $5,500 in annual contributions and a somewhat conservative return of 8%, I get the following numbers:
To keep this simple I’ve left out contribution limit increases over time which are expected to go up from today’s limit of $5,500. I also front-loaded the contribution to the beginning of each year.
Without the Spousal Roth IRA law, only the working spouse would be able to contribute to an IRA. By adding my spouse to the mix, we double our tax-free saving efforts. Now the numbers look like this:
The amounts I’ve listed as not available at age 49 will still continue to grow in the account. At age 59 1/2, that money can be accessed tax-free and penalty-free. If we withdraw the $110,000 at age 49 and let the $62,000 in earnings ride at 8% until age 59, we’ll end up with about $134,000 at retirement age. This is without contributing one more dollar to the account.
Does the Spousal IRA Apply to Both Traditional and Roth?
Yes, the law applies to both traditional and Roth IRAs. That is spelled out in the tax code link above and in Publication 590-A/B, which serves as a somewhat easier translation of the IRA laws for the taxpayer.
My wife and I both have a traditional and a Roth IRA. The traditionals were rolled over from former employer plans. All four accounts are at Fidelity because that is where the 401ks originated and we’ve been happy with them. We chose to contribute to her Roth IRA because we can use it to diversify our retirement savings between vehicles, and the Roth money is more accessible for early retirement. We still get plenty of pre-taxed advantage through maxing out my 401k.
The income limit for a married couple filing a joint return is 2018 is $188,000. This means that for couples filing a joint return and having an Adjusted Gross Income (AGI) of more than $188,000 but less than $198,000, the contribution amount of $5500 phases out. More than $198,000 and the married couple cannot contribute.
For those couples with income below $11,000, they may only contribute up to their AGI. So if a couple has a combined AGI of $8,000, the total allowable IRA contribution is $8,000. In reality, if a couple has an $8,000 AGI, they probably aren’t concerned with retirement savings.
All of this is spelled out in Pub. 590-A/B, but the 2014 version is not posted to the IRS website yet. I’ve read that the 2014 version will be split into separate documents for the traditional IRA and Roth which should make for easier interpretation.
The obvious prerequisite to being able to utilize the Spousal Roth IRA is to be married. You also need to file a joint return and have a combined AGI of less than $198,000. If you are married and both spouses work, or you file taxes separately, this law doesn’t impact you. It’s when one of the spouses does not work that the exception kicks in.
A non-working spouse should really be called an income-free spouse because those of us that are married to them know how hard they actually work. While striving for financial independence you need to utilize every tax-advantaged savings tool there is. Don’t forget about this one.
Craig is a former IT professional who left his 20-year career to be a full-time finance writer. A DIY investor since 1995, he started Retire Before Dad in 2013 as a creative outlet to share his investment portfolios. Craig studied Finance at Michigan State University and lives in Northern Virginia with his wife and three children. Read more.
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