Being a stay-at-home parent has some upsides: You get more time to bond with your children and you don't have to pay an arm and a leg for day care or a babysitter.
For a lot of people, it also brings one significant drawback: Unless you can find a flexible, remote job, you may not be able to earn any income while also caring for your children. And that can make saving for retirement a lot more challenging.
But there's a special rule for married couples that could make things easier. Here's what you need to know.
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A spousal IRA could boost your household retirement savings significantly
Generally, you're not allowed to contribute to a retirement account if you aren't earning income yourself. But the government makes one exception to this rule in the form of a spousal IRA.
This is a regular IRA, either traditional or Roth, opened in the name of a stay-at-home spouse. You can save money there, as long as your partner earns at least enough income to cover contributions made to the spousal IRA and their own retirement accounts.
For example, let's say that you and your spouse both hope to max out your IRAs this year. That means contributing about $6,500 if you're under 50 or $7,500 if you're 50 or older. As long as your partner earns at least $13,000 ($15,000 if 50 or older), you can achieve your goal using a spousal IRA.
In order to take advantage of a spousal IRA, you'll need extra cash that you're comfortable setting aside until retirement. And that may not be easy if you're living off of one income. But for families who can swing it, this could effectively enable you to double your household IRA contributions for the year.
How to open a spousal IRA
Couples who are interested in this strategy can open a spousal IRA with any broker. But it won't be called a spousal IRA. You'll choose between either a traditional or Roth IRA, depending on what suits you the best.
Traditional IRAs give you a tax break on your contributions upfront, but then you have to pay taxes on your contributions and earnings when you take the money out. Roth IRAs don't give you an upfront tax break but allow for tax-free withdrawals later.
Generally, Roth IRAs make the most sense if you expect your tax bracket to stay the same or rise in retirement. But if you anticipate your income -- and tax bracket -- will drop significantly in retirement, a traditional IRA could be a better fit.
Once your account is open, you can start making contributions on a set schedule or by adding funds as you have the extra cash. Just be careful not to exceed the annual contribution limits or you could incur penalties.
Also, it's worth noting that spousal IRA funds belong to the person whose name is on the account, even if the couple were to later divorce. No one wants to think about that possibility, but unfortunately, it happens. Knowing this about spousal IRAs upfront could help you avoid an unpleasant surprise if you find yourself in that situation.
A spousal IRA is worth discussing with your partner, especially if you're looking for ways to increase your household's retirement savings. But it might not be your only option.
If your partner has access to a 401(k) through their job, you could put more money there, instead. Or if you have a side hustle, you could save in a self-employed retirement account. Explore all the options available to you before deciding which is best for your family.
