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Carla Fried: Minimize the cost of pandemic career interruption with a spousal IRA

April 19, 2021 Updated Fri., April 23, 2021 at 5:14 p.m.

Couples married, filing jointly can fully fund nonworking spouse’s account.  (Dreamstime/Tribune News Service)
Couples married, filing jointly can fully fund nonworking spouse’s account. (Dreamstime/Tribune News Service)
By Carla Fried Rate.com (TNS)

Mothers with young kids bore the brunt of adapting to the stay-home, remote-learning demands of the coronavirus, leaving jobs at three times the rate of fathers, by one count.

The loss isn’t just current income. Retirement security is also at stake, with the loss of a workplace retirement plan (if you were fortunate enough to have one) and the loss of 2020 income to boost your Social Security earnings record.

Spousal IRAs

For some, a spousal IRA can partially make up for these losses. OK, if you’re up on your IRA rules you might be thinking, “Hey, but don’t I have to have earned income to contribute to an IRA?” Yes, and no.

The general rule is that people who contributes to their IRA must also report earned income on their tax return that is at least as much as the money they stuffed in their IRA.

But in a nod to spouses who do the work of keeping the family functioning – raising kids, caring for aging parents – that doesn’t come with a paycheck, the IRS allows contributing to a spousal IRA, based on the earned income of the working spouse.

Spousal IRA rules

There’s still time to contribute to a 2020 IRA. The deadline for all 2020 IRA contributions is May 17.

You must file a joint federal tax return. If you use the “married filing separately” option, you aren’t eligible for a spousal IRA.

You can contribute based on the other spouse’s earned income. If you were younger than 50 in 2020, you can contribute up to $6,000. Over 50? Your annual contribution limit for the year is $7,000. (Those contribution limits are also the same for the 2021 tax year.)

For example, if you are younger than 50 and want to make a maximum $6,000 contribution for 2020, your joint tax return needs to show that there was $6,000 of earned income. Doesn’t matter who earned it. If both of you want to make $6,000 contributions, your tax return will need to show there was at least $12,000 in income.

Manage to sock away $6,000 pronto and keep that sum alone growing for 30 more years and you will have nearly $35,000, assuming a 6% annualized rate of return. Manage to save $6,000 a year for the next five years and in 30 years you will have nearly $155,000.

It’s just a normal IRA account.

There is no special “spousal” IRA account for which you need to sign. The spousal just refers to the fact that you can contribute to any IRA even if you don’t have earned income of your own, but you are married and file a joint tax return.

In fact, if you already have an IRA account, you can just add to that account.

New to IRAs? Don’t worry, here’s a quick course in opening one:

• Open an IRA account at a discount brokerage, such as Fidelity, Schwab or Vanguard. You can do it online.

• Decide if you want to contribute to a traditional IRA or a Roth IRA. (Hint, a Roth IRA can be a smart option for a variety of reasons. As long as your joint income for 2020 was below $196,000, you can contribute the full $6,000 to a Roth IRA. The limit is $198,000 for 2021 contributions.)

The easiest way to make your contribution is to link your checking account (it’s free and easy) and have the deposit automatically e-transferred.

• Set up auto contributions for 2021 while you’re at it. You need to polish off contributing to a 2020 IRA by May 17. But you have until April 15, 2022, to make contributions to a 2021 IRA. Now that you’re on a retirement savings roll, consider signing up for the auto-savings option.

You can set up a schedule to have money transferred from your checking account into your IRA account. That’s how you ensure you stay committed to this important goal. Periodic contributions might also be easier to digest. A monthly contribution of $500 gets you to the $6,000 limit. If you’re at least 50, a monthly $583 transfer will get you the maximum $7,000 contribution limit.

• Choose the TDF. If you’re new to investing, all the investment options can seem daunting. A target date fund can be a terrific workaround to keep your money instantly diversified in an age-appropriate mix of stocks and bonds.

“There is no special “spousal” IRA account you need to sign up for. The spousal just refers to the fact that you can contribute to any IRA even if you don’t have earned income of your own, but you are married and file a joint tax return.”
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