Wealthy couples often started as newlyweds discussing their retirement planning goals. Throughout a marriage, one spouse occasionally takes a respite from the job force while the other spouse remains employed. It’s a good idea to continue to save for retirement for each partner even if one isn’t working. While the employed spouse can’t contribute to another spouse’s 401(k) or company-sponsored retirement plan, the working spouse may contribute to a spousal IRA or individual retirement account. While it’s not necessary to have the same amount of money put aside for each person, it certainly helps with peace of mind and bookkeeping matters. One spouse might experience a job lay-off that prevents her from contributing to a 401(k). Another spouse might decide to stop working to take care of the children or to help aging parents. If your spouse never works outside the home, it’s even more important to talk about retirement savings and planning goals as well as open a spousal Roth IRA. To keep it simple, focus on index investing. After setting up a spousal retirement account, go over the details with your spouse. According to an article by zacks.com, it’s critical to set aside retirement savings money regardless of employment status.
Opening up a Roth IRA
If your spouse does not work, you can open up a Roth IRA for her. If you need to lower your taxable income, opt instead for a traditional IRA instead. A Roth is funded with after-tax dollars, which means it won’t lower your tax liability the year you make the contributions. However, the money accumulates tax-free for retirement. And, your spouse won’t owe any taxes when she withdraws the money in retirement. All the rules about how much you can contribute to a Roth remain the same, even when it’s for a spouse. For 2018, the most you can contribute to a Roth IRA is $5,500 for yourself and another $5,500 for a spouse. If you or your spouse is over the age of 50, that maximum annual contribution goes up to $6,500.
Taking advantage of the retirement savings credit
Now everyone who saves for retirement gets to take advantage of the government’s retirement savings credit. Also, not everyone can make a direct contribution to a Roth IRA. In 2018, married couples filing jointly have to make less than $199,000 to directly contribute to a Roth IRA. Experts are careful to use the word “directly,” because there is another, “backdoor” way to get retirement money into a Roth. As far as the retirement savings credit, a person has to be age 18 or older, not a full-time student and not claimed as a dependent on another person’s tax return.
The retirement savings credit is 50, 20 or 10 percent of your retirement savings contributions up to $4,000 if married. The credit rate is based on the married filing jointly income level. If your adjusted gross income is $41,001 to $63,000 in 2018, you get a tax credit for 10 percent of your contribution up to that $4,000. For people who earn between $38,001 and $41,000, the saver’s credit goes up to 20 percent. Married filing joint couples who make no more than $38,000 in AGI have a credit rate of 50 percent of their contribution. So, a couple who saves $4,000 for retirement in 2018 and has an AGI of no more than $38,000, would see their tax liability decrease by $2,000. For some couples, that could mean a tax return of $3,000 instead of $1,000.
Many couples discuss their retirement accounts as part of estate planning. Even though a spouse is typically the beneficiary of a spouse’s retirement accounts, it’s still important to fund separate a spousal Roth IRA if possible. For some couples, it’s about peace of mind. At Roberts Tax and Retirement Planning, we answer all your retirement planning questions. For more information, contact us.