For most clients, retirement income planning is high on the list of financial priorities—but many advisors overlook the fact that this is no different for a client who is a non-working spouse. While the options for a working—earning—client may be relatively straightforward, retirement planning can become much more complicated for clients who are either full-time homemakers or who are employed in lower paying jobs because of commitments in the home.
Because these clients generally do not have access to employer-sponsored retirement savings options, planning becomes much more involved. Fortunately, options do exist that can allow a non-working spouse to plan for a secure retirement, but it is often up to the advisor to suggest and implement a planning strategy that can benefit both spouses to maximize tax-preferred retirement savings for the entire household.
The IRA Option
A spousal IRA is not only a powerful savings tool that can provide retirement security for a non-working spouse, but it is also a tool that can help the working spouse maximize total allowable tax-preferred contributions to retirement accounts. An IRA cannot be titled jointly (though a spouse may be named beneficiary), but a non-working spouse may contribute to an IRA in his or her own name even if he or she has no compensation, so long as the working spouse has compensation and the couple files a joint return.
The annual contribution limits for the non-working spouse are the same as those that apply in the case of a working client–$5,500 per client, or $6,500 for clients age 50 and older (or total compensation for the year, if less than this limit). The total compensation reported on the couple's joint tax return is the relevant figure—so it is not necessary for both spouses to earn income in order to maintain two separately titled IRAs.
(Same-sex married couples can now take advantage of spousal IRAs. See Planning Challenges Persist for LGBT Clients Despite Marriage Ruling)
This strategy benefits both spouses—the non-working spouse gains the security of maintaining his or her own retirement account, while the working spouse is able to reduce total tax liability by doubling IRA contributions for the year.
Social Security
