Everyone knows they need to save more money for both the short term and the long term. But according to multiple studies, women consistently lag far behind men in terms of retirement savings. One big reason is that women in particular spend more time out of the workforce in order to care for children or other members of the family, which means they spend years with little to no income.
And unlike other financial accounts or assets, retirement accounts must have a single owner and cannot be titled as joint accounts. For the most part, an individual account owner must have their own taxable compensation in order to contribute to a tax-sheltered retirement account. Therefore, when a woman spends some time out of the workforce, her own retirement account remains unfunded.
The good news
Fortunately, there's a way for married women who leave the working world, whether temporarily or permanently, to continue saving for retirement. The spousal IRA allows an unemployed spouse to fund an IRA with earned income from the working spouse. Therefore, even though an individual must have taxable compensation in order to contribute to a retirement account, the IRS does make an exception for a married couple who file a joint income tax return and have at least enough household income to cover the total amount of IRA contributions made in both spouses' names. For example, if two spouses each contribute $5,500 to an IRA (the annual limit for those under age 50) for a total of $11,000, then the household income must be at least $11,000.
The spousal IRA is no different from any other IRA, be it traditional or Roth. For 2017, you can contribute $5,500 if you are under 50 or $6,500 if you are 50 or older. In addition, for a traditional IRA, if the working spouse is not covered by a retirement plan at work, then your IRA contributions are fully deductible. However, if one spouse is covered by a workplace retirement plan, then your ability to deduct your contributions depends on your modified adjusted gross income. The percentage of your contribution you can deduct begins to shrink as your MAGI exceeds $99,000. Once your MAGI crosses $119,000, you can't deduct contributions at all.
Meanwhile, your eligibility to contribute to a Roth IRA is phased out for household MAGI of between $186,000 and $196,000.
Here's a real-world example showing what a big difference the spousal IRA can make in boosting a woman's retirement savings. Let's say a woman spends 10 years out of the workplace to raise her children, and during that time, she continues to save $5,500 a year under the spousal IRA rules. If she earns 6% on that money, she will have $77,000 at the end of those 10 years (not accounting for increases in the IRA contribution limit or inflation). Now, let's say she then keeps that money in an IRA and allows it to grow for another 25 years, again earning a 6% return and not accounting for inflation. At the end of that time, she would have about $330,000. And all of that is from money that she saved while not working outside of the home.
For various reasons, many women have unfunded or underfunded retirement accounts. That's why it's more important than ever that women start working toward building their own financial security, and a spousal IRA is one smart way to do just that -- by allowing women to continue making some headway in retirement savings even while they're out of the workforce.
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