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Help Your Spouse Retire

Just because another Valentine's Day is headed into the history books, you shouldn't stop recognizing everything your spouse does for you. Whether he or she is working to bring in more income, helping keep the house in order, or just helping to coordinate and share in your mutual responsibilities, your spouse deserves considerable credit.

If you and your spouse have decided that just one of you will work, that doesn't mean that you can each ignore your individual financial goals. Yet with only one income, it can be a challenge to keep your spouse's finances in the same condition as your own. With all the benefits that many employers offer, such as employer-sponsored retirement plans, health and disability insurance, group life insurance, and flexible spending accounts, working spouses can often take care of most of their own financial needs with little effort. But non-working spouses have unfortunately limited access to many of these benefits. For example, married people who don't work aren't able to use their spouse's 401(k) plan to save for their own retirement; any assets in the retirement plan are generally treated as belonging solely to the working spouse.

In order to help non-working spouses save money for their retirement, the tax laws allow couples to set up retirement accounts for both spouses, even if only one works. By putting aside money in a special account called a spousal IRA, you can make sure that both you and your spouse will have retirement assets to protect you in your golden years.

IRAs and working
The general rule for IRAs is that you can contribute up to a certain limit each year toward your retirement. For 2007, the contribution limit is $4,000. People who are age 50 or older can make an additional $1,000 contribution in order to "catch up" with their retirement savings.

Alas, there's an additional provision for IRAs. In order to contribute to an IRA, you generally have to have what the IRS calls "earned income." For most people, earned income is composed of wages and salaries that you receive in your paycheck at work. If you don't work, you don't have any earned income. You're not allowed to count investment income, such as interest on bank accounts or dividends from stocks, as earned income for IRA purposes. Therefore, if you don't work, then the tax laws usually won't let you have an IRA in your own name.

Spousal IRA provisions
That's where the spousal IRA rules come in. If you meet the requirements, then your non-working spouse can open an IRA using your wages to meet the earned income test. Specifically, in order to qualify to open a spousal IRA, you have to file a joint tax return, and you have to have enough earned income to cover the combined total of your own IRA and the spousal IRA. For instance, if you contributed $4,000 to your own IRA during 2006, and you want to contribute another $4,000 to a spousal IRA, then you need to have at least $8,000 in earned income in order to make the full contribution to your spouse's IRA.

Also, you're not allowed to use a spousal IRA to circumvent the rules regarding age limits for IRA contributions. For regular IRAs, you're not allowed to make contributions for a given year if you'll be age 70 1/2 or older at the end of the year. Similarly, if your spouse will be age 70 1/2 or older, then you're not allowed to make a spousal IRA contribution.

Opening a spousal IRA
One thing to remember is that a spousal IRA is a separate account from your own IRA. Even though your spouse is using your earned income to qualify, the account will be in your spouse's name. The tax laws don't allow joint IRAs with both spouses' names on the same account.

If your spouse already has an IRA account, you can use it for your spousal IRA contribution, even if your spouse initially opened the account while employed. There's no requirement that you create a separate account solely for spousal IRA contributions; once you've made the contribution, the tax laws don't distinguish IRA assets deposited using the spousal IRA rules from any other IRA assets. As with any other IRA, you have to deposit cash; once the money's in the account, however, you can buy anything from ETFs like SPDR Trust and Proshares Ultra S&P 500 to individual stocks like Caterpillar. Also, if you want to use the spousal IRA provisions to open a Roth IRA, that's fine, as long as you meet the income restrictions and other requirements that generally apply to Roth IRAs.

Successful retirement planning for couples should be a family affair, and coordinating benefits for the good of both spouses is an important element of a successful financial plan. However, even when just one spouse works, it's useful to take advantage of all the tax provisions that support both working and non-working spouses. The spousal IRA provisions represent one example of how, when you're looking at retirement planning for your family, everyone should be involved.

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If you want to learn more about IRAs, check out our IRA Center. For more helpful tips about every aspect of your retirement planning, give our Rule Your Retirement newsletter service a try. It's yours free for 30 days.

Fool contributor Dan Caplinger is using the spousal IRA provisions for the first time this year. He doesn't own any of the companies mentioned in this article. The Fool's disclosure policy never retires.


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Dan Caplinger
TMFGalagan

Dan Caplinger has been a contract writer for the Motley Fool since 2006. As the Fool's Director of Investment Planning, Dan oversees much of the personal-finance and investment-planning content published daily on Fool.com. With a background as an estate-planning attorney and independent financial consultant, Dan's articles are based on more than 20 years of experience from all angles of the financial world.

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