A stay-at-home parent recently asked me about saving for retirement despite her not working. She did not know that there was such a thing as a Spousal IRA, so I thought it would be a good idea to share that knowledge here as well.
Many parents make the decision that after their child is born one parent will stay at home to be with the child. Some of the reasons include saving on daycare expenses, and wanting at least one parent to bond and be with the child during those precious first few years of development.
Whatever the reason, the stay-at-home parent may leave a job and lose access to certain benefits – mainly their employer sponsored retirement savings plan. Although the stay at home parent has lost this benefit, it doesn’t mean that they have to stop saving for retirement.
One benefit the stay-at-home parent can take advantage of is the spousal IRA. Spousal IRAs aren’t a specifically titled IRA. In other words, the IRA needn’t be titled “Spousal IRA.” It’s simply an IRA in the stay at home parent’s name – no different than if they had an IRA and were currently working.
Generally, in order to contribute to an IRA a person needs to have earned income. This means W2 wages from employment. Since the stay at home parent is no longer working, this may seem like an insurmountable obstacle. The solution however is pretty easy.
The stay-at-home parent can still contribute to the Traditional IRA or Roth IRA as long as the working spouse has enough earned income for the stay-at-home spouse to make a contribution. For example, let’s assume that John is a stay at home parent and his wife Jane works a full time job earning $60,000 per year. For 2017, both Jane and John can make maximum IRA contributions of $5,500 to each of their IRAs (we’re assuming they’re under age 50). Jane is able to contribute off of her earnings and John is allowed to contribute since Jane has enough earned income. Thus John takes advantage of this as her spouse.
Although John may have lost access to his prior company’s 401k plan, he can still save for his retirement as long as Jane has enough earned income. Finally, Jane and John’s contributions are limited to Jane’s earned income for the year. In other words, if Jane only had earned income of $8,000 for the year, she could put $5,500 in her IRA and only $2,500 in John’s IRA for a total of $8,000 – her maximum earned income for the year.