personal finance

Even If You Aren't Working, You May Be Able to Open an IRA. Here's How

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If you are not working and married, you may be leaving tax-deductible money on the table — money that could go towards your retirement savings.

While you typically need to have income to open an individual retirement account, there is an exception for married spouses who file their taxes jointly. It's known as a spousal IRA, but it is simply a traditional or Roth IRA in the non-working spouse's name into which both partners can make contributions.

Many people don't realize the benefit is available to them, said certified financial planner Carolyn McClanahan, an M.D. and founder and director of financial planning at Life Planning Partners, based in Jacksonville, Florida.

"They are happy just doing their 401(k)," she said. "A lot of people don't think about opening their own IRA and the benefits of the IRA."

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Individuals can contribute up to $6,000 in 2021, or $7,000 if they are age 50 or older. That means for married couples filing jointly, they can contribute a combined maximum of $12,000 or $14,000 this year. The working spouse must have an income that is equal to or exceeds the total contributions.

Meanwhile, if you worked and already have an IRA, but then stopped working, there's no need to open a new IRA for spousal contributions. Those can be made into your current IRA.

To be sure, there are some limitations.

Traditional IRA income caps

If the working spouse is not offered a qualified retirement plan through their employer, then there are no income limits to doing a spousal IRA.

If they do have the option of a 401(k) or other employer-sponsored plan, tax-deferred treatments may be reduced, depending on the couple's income (detailed here).

"For anybody who doesn't have to worry about the income thresholds and can make a spousal IRA contribution, it is an extremely powerful tax deduction," said Travis Hood, a certified public accountant with Kahan, Steiger & Company, based in Stamford, Connecticut.

"You are funding your own retirement and you get to receive a deduction for that funding of your own retirement."

For instance, by saving $6,000 each year for 30 years, at 5% interest, you'll have more than $400,000 saved for retirement. That's in addition to whatever the working spouse saves in their retirement account.

To be sure, no matter whether you can get a full or partial deduction, contributions to the worker's own retirement plan are unaffected, so if it is a 401(k), they can still contribute up to $19,500 in 2021, plus a $6,500 catch-up deposit if over age 50.

Even if your income doesn't qualify you for tax-deductible contributions, that doesn't mean you can't put money aside into a spousal IRA. You just don't get the deduction.

"You still get tax-deferred growth in that IRA," he noted. "Anytime you can defer paying income taxes, it is typically prudent to do so."

Not only does that money grow tax-deferred, it is also a protected asset from creditors, said McClanahan, a member of the CNBC Financial Advisor Council.

"It is a way to put more money away where you don't have to worry about it being ever taken away from you for whatever reason," she said.

Spousal Roth IRA

Roth IRAs appeal to many because contributions are made after tax, and therefore you don't have to pay taxes when you take the money out in retirement.

However, they have income limits. Married couples filing jointly can contribute the maximum of $6,000 or $7,000, depending on their ages, if they make less than $198,000. They can contribute a reduced amount if they make between $198,000 and $208,000.

After that, they don't qualify.

Yet there is still a way to have a Roth through what's called a back-door conversion, which both McClanahan and Hood recommend in the right situations. Essentially, you contribute to a traditional IRA and then convert it into a Roth IRA.

"If you are going to do it, either consult a professional or make sure you are pretty well versed with the rules," Hood said.

"You want to convert it immediately because you don't want any earnings on the IRA before it is rolled into a Roth."

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