A Spousal IRA May Spark Marital Financial Planning Magic

A spousal IRA not only helps couples save for retirement but can also help their overall financial planning strategies.

UBS conducted a study last year and it shares that only 20% of couples participate in financial decisions equally. Among more than 70% Millennial women (those born between the early 1980s and 1990s) deferred to a spouse for financial decision making. Almost 95% of Millennial men would welcome greater participation from a spouse in this area.

Multiple reasons are cited in studies for why some women in marriages have so little participation in the financial planning process. Research cites lack of confidence, entrenched roles, complacency and keeping the peace as some of the primary reasons.

If lack of investment experience is problematic among women it should be remedied. Demographics remind us that women usually live longer than men. Also, women more so than men may suddenly assume roles as caregivers. The COVID-19 pandemic underscores how swiftly the family wellness landscape can change. A marriage partner as a caregiver can be overwhelmed when taking the lead in also being the financial decision maker in such circumstances.

Awareness for personal financial decision making within the Department of Defense and federal agencies’ communities may stem from how the knowledge to do so is acquired. Military and federal employees receive orientation on the Thrift Savings Plan (TSP) and other benefits such as insurance and pensions during working hours in the workplace. This arrangement precludes the spouse a seat at the table. Some military and federal agencies allow spouses to attend retirement seminars for a soon to be retired military service person or federal employee. It has been my experience that such spousal attendance is usually extremely low. 

Individuals with earned income can fund an IRA. Those earning beyond $6,000 can invest up to $6,000 in an IRA and for those age 50 or greater an additional $1,000 can be contributed from earned income totaling at least $7,000. But what about a person who earns nothing or less than the $6,000 or $7,000 thresholds? 

Spousal Individual Retirement Arrangements (IRA) may be a solution – not the solution – to greater spousal partnership in the financial planning process.

A spousal IRA account can be created on behalf of a spouse who earns nothing up to less than $6,000 or $7,000 if age 50 or older. This is an exception to the rule that a person must have enough earned income to contribute to an IRA. The named spouse is the account owner of the IRA, independent of the federal employee’s income. Couples filing separate tax returns are not eligible to contribute to a spousal IRA. Only those filing a joint tax return for spousal IRA eligibility. 

Spousal IRAs have the same contribution limits as regular IRAs. For 2021 and 2022 that would be $6,000 per individual plus an additional $1,000 for those age 50 or older. A choice exists between a traditional IRA or a Roth IRA.

My rationale for believing spousal IRAs would be a step toward greater mutual financial planning for married couples is based upon the role of ownership. The relationship between the banks or brokers holding the IRA accounts with the spouses is about the responsibilities of ownership. Many brokerage firms and banks offer excellent educational materials on investments to participants. Topics range from portfolio rebalancing, risk analysis, behavioral finance. Asset allocations, beneficiaries, and withdrawal decisions are the purview of spouses owning the IRA accounts. I believe spousal IRA enrollments will increase financial planning interaction within marriages owing to the mechanics connected with spousal IRA ownership. 

IRA ownership instills confidence and offers a heightened sense of security for the future. Such ownership changes our feelings by providing a sense of control. Stewardship accompanies ownership. The result is heightened awareness with financial planning.

It may not be too late for spousal IRAs for 2021. IRA contributions can be made prior to filing taxes for that tax year.

A traditional IRA for the spouse not working or making some income is possible if the other spouse works for the federal government. Since all Federal employees have a retirement plan, a tax deduction, however, may not be fully deductible for traditional IRAs. When the couple is filing a joint return and their Modified Adjusted Gross Income (MAGI) is between $198,000 and $208,000 the tax deduction is phased out for year 2021. For tax year 2022 the phase out will occur between $204,000 to $214,000.

A spouse of a federal employee can also own a Roth IRA. Married couples filing a joint return with a MAGI of up to $198,000 can think about a Roth IRA for the spouse who is not a federal employee. Partial Roth IRA contributions are allowed when the MAGI is between $198,000 to $208,000 for tax year 2021. Roth IRAs are allowed below $204,000 for 2022 with a phased in window being modified from $204,000 to $214,000.

About the Author

Francis Xavier (FX) Bergmeister, CLU®, ChFC®, CASL®, ChSNC® has been Certified Financial Planner® for 30 years. He is a graduate of the Wharton School and earned a Doctor of Arts from George Mason University. He provides retirement seminars thru Federal Career Experts.