This is a guest post from Ciaran of Chance Favors Financial Planning and Retirement Blog. He hopes to educate, encourage and empower those in their 30’s and 40’s to achieve financial independence. I asked him to explain how spousal IRAs work, since I haven’t seen the point addressed much on the blogosphere. If you enjoy the post, consider subscribing to his feed.
I think there are some misconceptions about spousal IRAs that sometimes discourage SAHMs (Stay At Home Moms) from investigating further. I plan on clearing that up right here, right now:
First off, don’t let the word “spousal” throw you off. The only difference between a normal IRA and a spousal IRA is that your spouse’s income is used to determine whether or not a contribution can be made into your IRA account. Other than that one rule, everything else is exactly the same.
Once the contribution has been made into the spousal IRA account, it’s subject to the same rules as any other IRA account. (Click the link in the previous sentence to learn more about all the normal IRS rules associated with IRA contribution eligibilty, deductibility limits, etc.)
Without further ado…
7 things you need to know about Spousal IRAs if you’re a SAHM:
#1 – In order to qualify to make a spousal contribution you have to be married and file a joint tax return.
#2 – The consequences of having a spousal IRA are exactly the same as if you had your own qualifying income. You own the IRA (as your name will be on it) and it’s considered your contribution.
#3 – A spousal IRA can come in the form of a traditional IRA or a Roth IRA. Like anyone else, you decide which of the two IRAs makes the most sense. IMO, if you’re going to make an IRA contribution I believe in prioritizing the Roth IRA.
#4 – For 2008, the maximum IRA contribution is $5,000 per person (under the age of 50). As long as your spouse has earned income over $10,000, you (as a family) would be entitled to make 2 full contributions of $5,000 each. Of course, you could always contribute a lesser amount.
#5 – (right from the IRS website) If you’re divorced or legally separated (and do not remarry) before the end of the year, you cannot deduct any contributions to your spouse’s IRA. After a divorce or legal separation, you can deduct only the contributions to your own IRA. Your deductions are subject to the rules for single individuals.
#6 – Any assets in an IRA account are yours, regardless of whether or not the account was established as a normal IRA or spousal IRA. If you get divorced, the assets in a spousal IRA account are in your name. As far as how ANY “individually owned” or “jointly owned” assets get divied up, as part of a divorce settlement, would be up to the parties involved and their lawyers.
#7 – Remember IRA stands for Individual Retirement Account. Although this is a simple fact, you’d be surprised how many people forget this and end up becoming confused about what IRA stands for. I promise you, if you can remember what IRA stands for you will be far less confused (going forward) about the different nuances and quirks associated with the different types of IRA accounts.
I hope this helps to de-mystify some of the confusion surrounding spousal IRAs. If you have any further questions, don’t hesitate to make comments below and I’ll be more than happy to help. Otherwise, I’ll leave you with one suggestions: Be vigilant about planning your future and if you and your spouse can afford to open a spousal IRA, I would do so immediately!