Generally, you need earned income to contribute to a Roth IRA. For married couples, there is an exception. You can contribute to an IRA for a non-working spouse, up to the maximum annual limit. A spousal Roth IRA isn't a joint account, but can be an effective way for couples to double their retirement savings.
Spousal IRA rules
The IRA contribution limits for 2016 and 2017 are $5,500 per year with an additional $1,000 allowed if you're over 50 or your earned income for the year, whichever is less. In other words, if you don't have any earned income, you generally cannot contribute to an IRA.
For married couples, however, the earned income requirement can be fulfilled entirely by one spouse. As long as one spouse earns enough to cover both spouses' contributions, that individual can contribute to their own account as well as to an account in the non-working spouse's name.
Keep in mind that a spousal IRA isn't a joint account. In fact, there is no such thing as a joint IRA at all -- the "I" stands for individual. Instead, this is an account opened up in your spouse's name to set money aside for retirement. The benefit is that as a couple, you can effectively double your savings rate into IRAs, thereby doubling the tax benefits you would otherwise be entitled to.
For example, let's say that you earn $75,000 in 2016, well above the maximum IRA contribution, and that your spouse is a stay-at-home parent. If you're both under 50, this means that you can contribute $5,500 to an IRA in your own name and an additional $5,500 to an IRA in your spouse's name.
Why choose a spousal Roth IRA?
For most people, there are two main choices when it comes to IRA investing -- traditional or Roth. The main difference is the tax benefits. Traditional IRA contributions may be tax-deductible, but withdrawals will be taxable in retirement. On the other hand, Roth IRA contributions are not deductible, but qualifying withdrawals will be 100% tax-free.
In addition to the tax benefits, there are a few other advantages of Roth IRAs.
- Roth IRAs have no required minimum distributions. Traditional IRAs require you to withdraw a minimum amount beginning at age 70 ½.
- Similarly, there is no maximum age to contribute to a Roth IRA. As long as you have earned income, you can contribute to a Roth if you're 85.
- Roth IRA contributions (but not any investment profits) can be withdrawn at any time, and for any reason, without a penalty. In contrast, if you withdraw from a traditional IRA before retirement age and don't qualify for an exception, you'll face a 10% early withdrawal penalty from the IRS.
Here's a more thorough discussion of Roth IRAs and their benefits, if you're interested.
It's also worth noting that spousal Roth IRAs are subject to maximum income limits as well. For married couples filing a joint tax return, the maximum adjusted gross income (AGI) for a full Roth contribution is $184,000, and each spouse may make a partial contribution if their combined AGI is above this amount, but less than $194,000. For the 2017 tax year, both thresholds are increasing by $2,000, to $186,000 and $196,000, respectively. There is a "backdoor" method that higher-income individuals can use to contribute, and here is a discussion about that if it applies to you.
Double your savings rate
A spousal IRA can allow you to double your retirement savings rate, while still taking advantage of the tax benefits of IRA investing. Consider this: If you contribute $5,500 to a Roth IRA for 30 years and match the market's historical return rate, you'll have just over $823,000 saved for retirement by the end of that time period. If you contribute to your own and a spousal Roth IRA for 30 years, this doubles to about $1.65 million. And keep in mind that this is tax-free retirement savings.
If you'd like to learn more about spousal Roth IRAs, or IRAs in general, be sure to check out the Motley Fool's IRA Center.