IRAs are immensely helpful tools for retirement savings. If you know their basics and contribute to at least one, you'll probably profit from it. But dig deeper and learn more, and you may discover some strategic moves you can make with IRAs that benefit you even more. For example, there's the spousal IRA.
First, let's back up a bit to review some IRA basics. There are two main kinds of IRAs: the traditional IRA and the Roth IRA. The traditional IRA lets you deduct your contributions from your taxable income, lowering your tax bill that year. The money can then grow in the IRA account until it's withdrawn, when it's taxed at your income tax rate at that time. With a Roth IRA, you contribute post-tax money, but when you withdraw funds from your account in retirement, it's all tax-free.
Here's another little detail that applies to both traditional and Roth IRAs: They can only be funded with earned income. Thus if you're unemployed or are a stay-at-home caregiver or full-time student, you may find yourself unable to contribute to an IRA. That's a bummer, because regular investments in IRAs can grow into tax-advantaged nest eggs worth hundreds of thousands of dollars -- or even a million or more.
But wait! There's a loophole!
This loophole isn't entirely fair, as it's only available to married couples, but for certain married couples, it can be a godsend. Imagine a married couple with one spouse who works and one who doesn't. Spousal IRA rules let you work around the earned-income rule by permitting the spouse with earned income to contribute to an IRA for both parties.
Here are a few other things to know:
- The spousal IRA works for both traditional and Roth IRAs.
- The married couple must file their tax return jointly.
- The working spouse's earned income must meet or exceed the total sum contributed to both IRAs.
- The spousal IRA belongs to the person whose name it's in. There's no joint ownership of it, though of course the money in it can support both spouses.
- Spousal IRA contributions can't be made to a traditional IRA for anyone 70-1/2 or older. But Roth IRAs have no age limit.
- Regular IRA rules remain the same, such as the contribution limit of $5,500 per person in 2014 (plus a $1,000 catch-up allowance for those 50 or older). The income limits, whereby high-earning folks lose their eligibility to contribute, are the same, too.
- Those who don't participate in workplace-sponsored retirement plans such as 401(k)s can deduct the full amount of any spousal contribution to a traditional IRA. But as with non-spousal traditional IRAs, those participating in workplace plans may have their ability to deduct IRA contributions restricted. (In that case, consider contributing to a Roth IRA instead.)
- As with regular traditional and Roth IRAs, contributions for the current tax year (2014) can be made up until the tax-filing day for that year (April 15, 2015).
For one-earner couples, it's well worth considering contributing to a spousal IRA. That way you can save twice as much for a retirement you both hope to share together. Don't be afraid to ask for help in your retirement planning, too.