The Spousal IRA: Going Traditional or Roth?

Setting up a spousal IRA can be a great way to help bolster your retirement savings. When opening a spousal IRA, you will be forced with the decision of choosing between the traditional IRA format or a Roth IRA. Here are a few things to consider when making the decision.

What is a Spousal IRA?

In most cases, you can not start an IRA unless you have some type of earnings over the course of the year. If you are unemployed, this means that you are typically not eligible for an IRA. However, with the spousal IRA, you can open an IRA if you are the spouse of someone that does work. The working spouse will need to make enough money to fund both IRAs and the couple can contribute a full $10,000 per year between both accounts. This can be a great way to double the amount of money that goes into your retirement as a couple.

Traditional IRA

One option that you have for a spousal IRA is the traditional IRA. With a traditional IRA, you make tax-deductible contributions to the account and then use that money to make investments. The money that you make from the investments is also tax-free while it is in the account. Then when you reach the age of 59 1/2, you are allowed to start making withdrawals. At that point, you will start paying taxes on the money as you withdraw it. With the spousal IRA, you have to make sure that your contributions to this type of IRA will be tax-deductible. If the working spouse is not an active participant in a retirement plan at work, then the full contributions to both IRAs would be deductible. If the working spouse does participate in a work retirement plan, then your income has to fall within a certain range to be deductible. If your income is less than $167,000, then you can still deduct your full contribution to the IRA. If you make between $167,000 and $177,000, then part of your contribution is deductible. Above that threshold, none of it would be deductible. 

Roth IRA

Another option that you have for your spousal IRA is the Roth IRA. The Roth IRA is similar to the traditional IRA except in the way the taxes are handled. When you make contributions to a Roth IRA, you will do it with after-tax dollars. Then you are free to invest those funds and the earnings from the investments are tax-free. Then when you reach the age of 59 1/2, you can take withdrawals from the account without paying any income tax on the money. 

This option makes a lot of sense if you are in a low tax bracket when you begin the IRA. When most people begin their careers, they will be in a low tax bracket. Therefore, they are paying the lowest amount of tax possible on the money regardless of how high their tax bracket gets as they age. 

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