Who can have a spousal IRA?
The spousal IRA is set up in the nonworking spouse's name. That's a big advantage for people who give up the security of having a retirement plan when they choose to stay home to care for children or others, says Cindy Hounsell, an attorney and president of The Women's Institute for a Secure Retirement.
"It means that once a contribution is made to that IRA, it belongs entirely to the person who owns it, and not the person who made the contribution," Hounsell points out.
The prerequisites for having a spousal IRA are simple. One of the spouses has to work and make enough money to fund the spousal IRA. If the mostly nonworking spouse has some but not much income, it can count toward the funding amount, too. The couple also must file a joint tax return.
The annual funding limits are the same as they are for regular IRAs: $5,500 for those younger than age 50; $6,500 for those who are 50 or older.
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How spousal IRAs can grow
"Craig," who blogs anonymously at RetireBefore Dad.com, says he and his 39-year-old stay-at-home wife have saved more than $33,000 in her spousal Roth IRA in the last five years. "It is another great vehicle for us to save in a tax-advantaged way," he says.
The couple's goal is to retire at age 55. If they continue to put aside $5,500 for another 14 years, when Craig reaches that magic age, his non-working wife could have a tidy, tax-free nest egg of $173,130, assuming a modest 5 percent annual return. That doesn't include any catch-up contributions once they reach age 50.
For people enrolled in Medicare, David Bensema, regional director of planning for BMO Private Bank, says contributing to a spousal IRA by the spouse who continues to work also can help an over-65 couple avoid Medicare income penalties by lowering income. "Anything that drops your income into a lower bracket helps," Bensema says.
Keep the creditors away
Let's hope you don't have a bankruptcy problem as you approach retirement, but just in case, it is good to know that money in an IRA is protected in a federal bankruptcy proceeding, points out Bensema. In 2016 through 2018, protection is limited to $1,283,025.
This kind of protection can be particularly important for a spouse with no job and little current work experience, Hounsell says.
Your state determines whether an IRA is protected from other kinds of creditors. The Asset Protection Society tracks the rules of individual states.
Worth noting: The IRS is one creditor that can come after money in an IRA, no matter what state you live in.
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What's the best way to invest spousal IRA?
Someone with a long way to go before retirement can afford to invest money more aggressively than someone who is close to retirement.
Craig says that he and his wife are putting most of their money in low-fee ETFs and stock index funds. "It is typical stock market risk, but it's more aggressive than some financial advisers would recommend," Craig says.
He feels good about his investment decisions. "You have to look at the total picture. This is just part of our retirement planning," he says.