What the Heck Is a Spousal Roth IRA?

spousal Roth IRA

Many stay-at-home parents are unaware of the Spousal Roth IRA, which makes it possible to have financial security.

These parents believe that, because they do not have earned income, they can’t fund a Roth IRA.

Unfortunately, this leaves many stay-at-home parents worrying about how they can protect their financial futures.

Let’s start by admitting, that’s just a shame.

According to the Salary.com Mom Salary Survey, which tracks real-time market prices of all the jobs moms perform, found, “The median annual salary for stay-at-home moms in 2019 is $178,201.”

It’s important to note that while Salary.com specifies a mother’s work, many fathers are opting to take on the role of stay-at-home parent.

According to CNBC, “While it’s unclear how many men have made the transition to full-time parenthood during the pandemic, the long-term trend shows a rise of stay-at-home fathers, though they are still a minority. In 2016, dads made up 17% of all stay-at-home parents in the U.S., up from 10% in 1989.”

What we do know is that the pandemic has forced many parents to leave their jobs.

According to a report by Cleo, “Half of families have had one or both parents leave the workforce or scale back their career […].”

And 40% of all working parents are still considering leaving their jobs.

When these parents choose to leave their jobs (or are laid off), they lose earned income.

Just because you aren’t earning income doesn’t mean you should neglect your retirement savings.

That’s where the Spousal Roth IRA comes in handy.

What Is a Roth IRA?

The Roth IRA was introduced in 1997 and sponsored by Senator William Roth (hence the name).

A Roth IRA is an individual retirement account in which your money grows tax-free. 

The Roth allows those with earned income below a certain level (single individuals earning below $140,000 or married couples earning below $208,000 in 2021 and single individuals earning below $144,000 or married couples earning below $214,000 in 2022) to contribute.

Plus, you can invest in almost anything, such as stocks, bonds, mutual funds, ETFs, and even real estate, making this retirement account more flexible than others.

Since a Roth IRA is funded with after-tax money, your money grows tax-free, and then your withdrawals in retirement are tax-free.

Given the nature of a Roth IRA, opening and funding one may be one of the best moves you can make financially.

[Related Read: Roth IRAs vs. Traditional IRAs]

What Is a Spousal Roth IRA?

Many stay-at-home parents are unaware it’s possible to save for retirement with a Roth IRA because they don’t have the earned income required to open and contribute to one.

However, the Spousal Roth IRA allows a stay-at-home parent to open a retirement account in their own name and works the same way as a Roth IRA. 

As long as one person in the household has earned income and you file a joint tax return (tax filing status must be ‘married filing jointly’), you can open and contribute to a Spousal Roth IRA. 

Or the working spouse can contribute to a spousal Roth IRA on behalf of the spouse who does not work. 

The key here is that you must file a joint tax return, so if you get divorced, you cannot fund a Spousal Roth IRA. 

If you file a joint tax return, then both parents can contribute to their own Roth IRA accounts (with the non-working spouse contributing to a Spousal Roth IRA). 

It’s important to remember that an IRA stands for Individual Retirement Account; therefore, a Spousal Roth IRA is NOT a joint account

It is a separate individual IRA for the non-working spouse that is funded by the working spouse.

Note: If you do separate in the future, the money already in the Spousal Roth IRA belongs to the spouse in whose name it is (the non-working spouse).

The Spousal Roth IRA is a good way for couples to boost retirement savings. 

If the working spouse has already maxed out his or her contributions and still has funds to contribute, this is a solid option.

It is also a nice means to provide retirement security for a spouse who does a lot but doesn’t earn a paycheck. 

Watch the video below for a more detailed discussion. 

Contribution Limit to Spousal Roth IRA

While 401(k) and other retirement plans will see an increase in contribution limits this year, the IRA contribution limit for 2022 will stay the same.

Both Spousal and Roth IRA contribution limits will remain the same for 2021 and 2022, with a $6,000 maximum contribution limit. 

The catch-up contribution for people aged 50 and over remains unchanged with the additional $1,000.

Note: The amount of your combined contributions can’t be more than the taxable compensation reported on your joint return.

[Related Read: 2022 Retirement Plan Contribution Limits]

Advantages of a Roth and Spousal Roth IRA

Opening and funding a Roth IRA is a smart financial move for many Americans. Even more so if you are a non-working spouse who wants some financial security for the future.

Keep in mind that a Spousal Roth IRA has the same advantages as a Roth IRA.

These are the key reasons why a Spousal Roth IRA is a wise choice for many couples.

#1 Tax-free distributions – This is the #1 benefit of a Roth IRA. You funded this account with after-tax money, and, in retirement, your proceeds will be yours, free and clear of taxes. The key is to hold the account for 5 years or longer and be above the age of 59½.

#2 No Required Minimum Distributions – Unlike the Traditional IRA, there are no required minimum distributions (RMDs) at any age. This allows your funds to continue to grow tax-free.

#3 Better terms for early withdrawals than an IRA – If you need funds from this account (such as for emergencies), you will not be penalized for early withdrawals of your contributions. The 10% penalty will only be on the earnings if they are withdrawn prior to age 59½. Withdrawals from an IRA before 59½ have a 10% penalty, and you must pay income taxes on the amount withdrawn.

#4 Tax-free withdrawals for heirs – Unlike Traditional IRAs, your heirs will pay no taxes on the proceeds from an Inherited Roth IRA.

#5 Easy to open – Almost anyone can open one if you have earned income, or, in this case, you qualify for a Spousal Roth IRA. The contribution limits for 2021 are $6,000, and $7,000 if you are 50 and older.

Check out this video for a full explanation of the Roth IRA.

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