I took some time off of work to go back to school. My wife works full-time and we're wondering how to keep contributing to a retirement plan for both of us. I've heard about "spousal IRA" but what exactly does this mean?
Dennis, A Spousal IRA is probably just what you think it is. It's an IRA that allows a working spouse to contribute on behalf of a non-working spouse. To qualify, you need to file a joint tax return and, for the contributions to be tax deductible, you need to meet the same income limits as for a traditional IRA. Contributions are subject to the same $5,000 limit as traditional IRAs.
A spousal IRA is available if one spouse either is not earning wages or is earning less than the allowable contribution limit for the year, and the other spouse has earnings enough to cover the contribution for both of the couple. For 2011 & 2012, the limit per person is $5,000, with an additional $1,000 in catch-up contributions if the individual is over age 50 for the tax year.
If the other spouse is earning enough in wages to cover both accounts' contributions for the year, then both spouses are allowed to make contributions up to the limits. The total wages of both spouses must be at least $10,000 ($12,000 for over age 50) in order to make the full contribution for both spouses. If the total wages for both spouses is something less than that amount, then the total of all IRA contributions is limited to the total wages (could also include self-employment income) for the couple, assuming that they are filing jointly.
The spousal IRA could be an existing traditional IRA or Roth IRA - there's nothing special about it, other than that the contributions are coming from the other member of the couple.
Hope this helps -
Hi Dennis, great to see you furthering your education. [Side note: make sure to take advantage of any education tax credits to help offset the cost of your schooling.] Since your wife is working, if her employer offers a retirement plan like a 401k, that's probably the first place to put your retirement money, particularly if there are any matching contributions.
Then if you want to save beyond that, you could set up a spousal IRA for yourself. In essence, a spousal IRA is funded from your spouse's income and works like a typical IRA (same contribution limits, etc.). If your wife's employer plan is funded with pre-tax money (the typical situation), then you may want to consider a Roth IRA for your spousal IRA--that will give you a mix of retirement accounts with pre-tax and after-tax money. That strategy can pay off down the road in retirement. Of course, it all depends on your individual circumstances, but those are some ideas to consider.
Spousal IRAs let stay-at-home spouses contribute the full amount allowed to an individual retirement account in any given year even if they earn no personal income - as long as their husband or wife earns enough to cover their contribution. Contributions can be made to either a traditional or to a Roth IRA, subject to the usual income caps and contribution limits.
An additional consideration is the higher income limits on whether an IRA contribution is deductible depending if you are covered by a retirement plan at work. In most cases those using spousal IRAs are not working and therefore not covered. For example, in 2012 if joint filing and covered by a plan, income limit for full deduction is $92k; if not covered by a plan, $173k.