I have been talking about setting up an IRA for Mr. PiN forever, without actually getting it done.
For a few years, he didn’t want me to set one up for him. Then he wanted to wait until we had paid off the mortgage. This spring I was thinking about setting one up, and the pandemic hit; we decided it was better to beef up our emergency fund.
Now, though, those barriers are gone.
I thought it might be worth going through some of the questions I have about setting up a spousal IRA. I suspect I am not the only one with these sorts of questions. Except where noted, I found my information from the IRS publication 590-A.
As always, do not rely on what I write to make decisions for yourself. I am not your tax expert, or indeed any tax expert at all. I am just some random person writing on the internet. Do feel free to consult your own tax expert, or to look at the IRS forms yourself.
What is a Spousal IRA?
An IRA, or Individual Retirement Arrangement, can be funded if you have ‘taxable compensation.’ Here is what the IRS has to say about taxable compensation:
You would think that an at-home spouse wouldn’t be able to contribute to an IRA, as taking care of the house or children doesn’t provide ‘taxable compensation.’
However, if a couple is married and files taxes jointly, the non-earning spouse can have an IRA of their own, as long as the modified AGI (adjusted gross income) falls between certain limits.
From the guidance for 2020 (traditional IRA and Roth):
The minimum: The earning spouse needs to earn at least the amount being contributed to IRAs (in our case: hers and his). So at least $12,000 if both members of the couple are under age 50 and want to maximize their IRA contributions, up to $14,000, if both members of the couple are over age 50.
The maximum(s): On the other hand, once your joint modified AGI hits $196,000, you start losing some advantages. Your ability to take a tax deduction for contributing to a traditional IRA starts phasing out here, and for a Roth IRA, your contribution limits start dropping. Once your modified AGI hits $206,000, you can’t take any deduction for a traditional IRA, and you absolutely can’t contribute (directly) to a Roth IRA.
Why should we set up a Spousal IRA?
I think about the reasons to do this in two different ways: the emotional way, and the logical way.
The emotional way. My spouse works hard to keep the household going. Without his efforts, I would be spending attention and energy on non-remunerative things like grocery shopping, cooking, laundry, landscaping, house maintenance, car maintenance, going to the post office, etc. If I didn’t take time off to take care of that business, I would have to pay someone to do the work for me.
How can I not acknowledge his efforts? If he were working outside the home he could contribute to a retirement account. Therefore, it seems only fair that I/we put money aside for his retirement too.
The logical way. Even if my spouse did nothing to help the household financially, this is another way to allow money to grow tax-free. We should take advantage of every legal option, so Spousal IRA, here we come.
How much can be put in the IRA?
For 2020–and apparently 2021–the limit for someone under age 50 is $6000 a year. People age 50 and over can save an extra $1000, for a total of $7000.
This extra $1000 is the ‘catch up’ contribution.
What are the drawbacks?
Some drawbacks to contributing to the Spousal IRA:
- You have to save the money to put it into the IRA.
- You (mostly) have to wait until age 59 and 1/2 to access it. This is both a feature and a bug, as the biggest benefit of tax-free growth in an IRA is the time in the account/time in the market to maximize compounding opportunity.
- The money is now your spouse’s. This means that if you separate, that money is theirs, and you aren’t entitled to it. I would posit that if this is a big concern for you, you have bigger problems than I can address here.
How do I do I set one up?
Brokerage companies want your business.
If you go to any major brokerage website (Vanguard, Fidelity, TD Ameritrade, E*Trade, Schwab), they will make it easy to set up an account.
What kind of IRA should I set up, Traditional or Roth?
Looking at the maximums up above, if your modified AGI is over $206,000 for 2020, you have lost the major benefit of a traditional IRA: the ability to avoid paying taxes (for now) on your contribution.
However, if your modified AGI is over $206,000, you also can’t contribute directly to a Roth IRA.
You will have to open a traditional IRA with post-tax money. That seems to be the only option.
However, once you have a traditional IRA (funded with post-tax money), then there is the option to convert it to a Roth IRA. You won’t get the tax deduction now, but by converting to the Roth, you will get a great tax benefit later: qualifying distributions are tax free.
I would refer anyone to this post by The White Coat Investor on how this works. For more specific instructions, Physician on Fire has a post on how to do this at Vanguard.
Just for fun, here is the flow chart from the IRS to determine if the money you take out from your Roth IRA is a qualifying distribution:
Are the age limits on contributing to an IRA? What about using money from an IRA?
Putting money in a traditional IRA is limited to people under the age of 70 and 1/2.
Once you reach 72 (this is a recent change; it used to be age 70 and 1/2), you must take required minimum distributions from your IRA. See this IRA form.
You can be any age to put money into a Roth IRA. You can keep it there forever; there are no required minimum distributions.
I have special concerns about this because Mr. PiN is closer to 59 and 1/2 than I am. Being forced to take distributions after just a few years of investing and compounding would reduce some of the benefits.
Looking at the flowchart for Roth IRA qualifying distributions, we might have to keep the money in his Roth for a while (at least 5 years) before we can withdraw it tax free. I think we can make this work; we may have to remember to use it later (last) to avoid a tax surprise.
What investments can he use in his account?
To be honest, I think Mr. PiN would like to speculate invest in alternative investments. The general wisdom is that only a small amount–maybe 5%–of one’s portfolio should be invested in this sort of thing. While Mr. PiN has asked that I not share our real numbers with the world, I feel OK putting out there that our combined investment portfolio is large enough that $7,000 will be less than 5%. Perhaps not after 10 years of IRA contributions, but we should be OK for now.
So I wanted to look into whether it is possible to invest in alternatives (think: Bitcoin or other blockchain currencies, foreign currencies, gold) in retirement accounts.
I couldn’t find much on allowed investments for an IRA, only a list of prohibited investments.
For those who want to know, prohibited investments in your IRA include:
- Life Insurance
- Property for personal use (present or future)
- Artworks
- Rugs
- Antiques
- Metals (*)
- Gems
- Stamps
- Coins(*)
- Alcoholic Beverages
- Certain other tangible personal property.
There is an exception made for some gold and silver coins minted by the US Treasury, and some bullion. However, they have to be in the possession of a bank or an “IRS approved trustee.” Your IRA can’t buy coins for you to bury in your back yard.
We should be fine to invest in mutual funds and ETFs, individual stocks (though the current wisdom is that we shouldn’t go the individual stock route).
Looking around the internet, if Mr. PiN wants to invest in alternatives, he would need to set up a special IRA account (I think a different account for each category). These aren’t specifically forbidden by the IRS (except for gold, as above), but a quick review of the major brokerages doesn’t turn up any who offer this in retirement accounts.
How long do we have to arrange things?
Though it is better to contribute to an IRA early in the year–going on the principle that more time in the market is advantageous–we actually have until the due date to file our taxes. That means that we have until April, 15, 2021, to contribute to an IRA for the 2020 year.
So, although I would like to get things started before the end of the year (coming very soon), I do have a little leeway.
In conclusion
Thank you for reading with me so far.
Going through all this, I have realized a few things:
- Though it would have been better to start a spousal IRA years ago, it is not too late. Mr. PiN is not too old, and, assuming we live so long, in 20 or 30 years, we may be enjoying some tax free distributions from his Roth IRA.
- Though the limits for contributing to a Roth IRA keep going up every year, unlike my salary, it is safest for us to set up and contribute to a traditional IRA first, then jump through the hoops to convert to a Roth IRA.
- Mr. PiN may have to content himself with stocks and bonds for now in his IRA. If he really wants to invest in alternatives, we will have to do some research into which companies will even allow it. I’m too tired to deal with that right now.
What do you think about all this?