The information in this article is up to date through tax year 2019 (taxes filed in 2020).
When one spouse stays home and the other works full time, retirement can remain a priority. Here’s how:
The Spousal Exception
Individuals who are unemployed or bring in a small number of wages do not have the eligible income that allows them to contribute to an IRA. However, an exception comes in if you meet the following requirements:
- You must be married to someone who is employed.
- You must file a joint income-tax return.
- You must have compensation or earned income equal to or greater than the amount you contribute to your IRA.
The employed spouse is then allowed to make contributions to an IRA on behalf of the unemployed or low-income spouse. These are known as “Spousal IRA Contributions,” and they can come in the form of two main types of IRAs with their own spousal contribution limits: traditional IRAs and Roth IRAs.
A traditional IRA is an individual retirement account that allows a person to direct pretax income toward investments. Capital gains or dividend income taxes are only assessed when the individual makes a withdrawal. Depending on the taxpayer’s income, the traditional IRA may even be tax-deductible.
- Contribution Limits: For 2019, annual individual IRA contributions cannot exceed $6,000. If you are 50 or older, the limit is $7,000 per year. You may contribute that amount for both you and your spouse’s IRAs, for a maximum of $12,000/$14,000.
- Income Limits: There are no income limits to be eligible to contribute to a traditional IRA.
The difference between a traditional IRA and a Roth IRA has to do with the way they are taxed. Roth IRAs are not tax-deductible, unlike traditional IRAs, and certain retirement distributions may be tax-free. You contribute to the IRA with after-tax income and thus do not face taxes on investment gains. At retirement, you can withdraw funds without any income taxes. This sounds ideal, and it is. While the contribution limits still match that of traditional IRAs, there are income caps with Roth IRAs.
- Contribution Limits: Same as for traditional IRAs
- Income Limits: For 2019, those who are married and file a joint tax return can contribute up to the annual contribution limit (see traditional IRA contribution limits) if their combined modified adjusted gross income (MAGI) is less than $193,000. The individual may contribute nothing if the combined MAGI reaches $203,000 or more.
If You’re Set Up for Retirement through Work
If you do not have an employer-sponsored retirement plan such as a 401(k), you are eligible to deduct the full amount of your spousal IRA contribution. If you do have an employer-sponsored plan, and you’re still filing jointly, the income cap/range for deducting the contribution is $103,000 to $123,000.
So, if you’re legally married and are looking to boost your savings efforts to the fullest possible limit, consider filing your taxes jointly and making spousal IRA contributions.