I currently receive a healthy employer contribution into my retirement plan, and have considered opening a Roth IRA before adding any of my own contributions to the retirement plan at work. While investigating brokerages, investment minimums, etc. I ran across the term “Spousal IRA.” I had heard this term tossed around before, but never really taken the time to read up on the rules. Apparently, non-working spouses are eligible to use a portion of their working spouse’s income to fund their own Roth IRA. Before starting my own Roth IRA I think we’ll start one for my wife, and we’ll use her account to further diversify our overall portfolio.
Spousal Roth IRA contributions can be made to either a Traditional or Roth IRA. Even though they don’t offer the same upfront tax deductions as the Traditional model, we’ve elected to invest in Roth IRAs because the earnings grow tax free. The limits for contributing to a spousal Roth IRA are the same as those listed for individual investors – $5,000 per tax year if under age 50, and $6,000 for those 50 and older. The following income limits also apply:
- For married filing jointly — $169,000 modified adjusted gross income for tax year 2008
- For married filing separately — $10,000 modified adjusted gross income for tax year 2008.
We shouldn’t have to worry about the $169,000 combined income any time soon, although that would be a great problem to have!
Diversify Your Strategy
My wife and I agreed we would take a more conservative approach with her investment selections, sticking to well-diversified mutual funds aimed at both capital preservation and appreciation. I’m the risk taker in the family when it comes to investing, but at the age of 30 I can afford to take some risks. I don’t mean to imply my wife is older (in fact, we are the same age), but if I were to kick the bucket she would need to preserve the proceeds from insurance and investments for as long as possible. It makes sense to us to lay the foundation for such a plan now while I’m still around. While the proceeds would be invested outside of retirement accounts, her strategy would be much the same.
Inside my employer’s retirement plan I’ve selected an aggressive portfolio from the mutual funds available. To offset some of this risk, my wife’s spousal Roth IRA will be comprised of less-risky mutual funds, a few of which offer a balanced mix of equities, bonds and other fixed-value investments. In times of market expansion my employer plan will likely grow much faster than her Roth IRA will. But in rough times, while my balances are falling, her Roth IRA should hold much of its value in tact. This seems to be a good way to hedge against market fluctuations over the next couple decades.
Max out your contributions for both you and your spouse, if possible. Remember, Roth IRA withdrawal rules allow for the withdrawal of contributions at any time, without penalty or taxation. This lessens the worry of locking away your money in a retirement account without access until retirement age. But remember, it’s best to leave the money in your Roth IRA unless you really need it in an emergency.
What’s Mine is Hers; What’s Hers is Hers
Sorry, I couldn’t resist the joke. Actually, my wife and I pool all of our earnings together and consider any savings, investments, and debt to be both of ours, as it should be. I’ve never liked the idea of separate finances, unless you have a situation where older couples remarry and both have their own set of income and expenses. Even then, why not just share everything. After all, isn’t marriage the ultimate partnership?