Spousal IRA: Retirement for Stay at Home Parents

Marriage is expected to be a partnership, and when the marriage involves a stay at home spouse, the partnership takes on one of different roles and responsibilities. One person earns the requisite funds to run the household, while the other person cares primarily for the children and the home. Unfortunately for most stay at home parents, fulfilling this necessary and thankless job can actually put their finances at risk. Without their own retirement and/or savings accounts, stay at home parents may find themselves in even more difficult circumstances should the relationship change. A Spousal IRA can help reduce the financial risk to stay at home parents, allowing them to save for the future.

What is a Spousal IRA?

The Spousal IRA is designed for marriage partners who do not have jobs. If your spouse works, you can open one up and contribute up to $5,000 in 2009. (If you are at least 50, you can contribute an extra $1,000 as a “catch up” contribution.) Your spouse must have earned enough income to cover the contribution, and you must be married filing jointly. In a traditional IRA, this contribution is tax deductible. You can also open a Spousal Roth IRA for a non-working spouse, but, as with a “regular” Roth IRA, the contribution is not tax deductible. The advantage of the Spousal Roth IRA is that after age 59.5, and if the account has been open for at least five years, withdrawals are made tax free from the Roth IRA — since contributions aren’t tax deductible, you’ve already paid taxes.

IRS guidelines for the Spousal IRA

Obviously, though, it’s not as simple as staying within the contribution limits. There are all sorts of IRS guidelines, income phase-outs and mumbo-jumbo about who already has a qualified retirement plan. Here are some of the basic limitations:

A non-working spouse can contribute his or her $5,000, and a working spouse can also contribute $5,000, bringing the total to $10,000. But only if neither partner already participates in a qualified retirement plan.

A “qualified” retirement account includes accounts set up by self-employed persons.

Non-working spouse’s deductibility phases out when couples have an adjustable gross income of between $166,000 and $176,000.

A working spouse’s ability to make a deductible contribution for the non-working spouse starts to phase out with an adjustable gross income of $89,000 to $109,000.

Can gay couples open a Spousal IRA?

With marriage laws in Massachusetts and in California (until the Prop 8 ban is carried out), there are questions about whether stay at home gay spouses can take advantage of the Spousal IRA. The answer is an unequivocal “no.” This is because in 1996 Congress passed the “Defense of Marriage Act.” The act basically precludes any state laws allowing gay marriage by requiring that for purposes of federal laws, marriage is only between one man and one woman, and that a spouse can only be a member of the opposite sex. This means that the federal law pertaining to IRAs does not recognize gay spouses as actual spouses.

Gay spouses can open their own IRAs, however, just like any other person who is not recognized as married by the federal government. However, gay spouses cannot fund the IRA with money earned by their partners. Instead, they must have a job and earn the money going into the IRA. Of course, because the federal government doesn’t recognize the marriage, gay spouses’ earnings aren’t ever combined. So that makes staying withing the adjusted gross income limits a little easier (although it doesn’t help non-working, full-time parent gay spouses, and is probably poor comfort).

Speaking with a knowledgeable tax planner or accountant, or visiting the IRS Web site, might be a wise idea before deciding what to do. Most married couples, however, find that a Spousal IRA offers peace of mind for stay at home parents, and a certain amount of financial protection. A stay at home spouse does a great deal of work that is not recognized with a paycheck, and he or she should be well taken care of.