Planning for retirement as a couple can often seem straightforward when both spouses work. But what happens when only one partner earns an income? The Nonworking Spouse Method offers a valuable approach to ensure both individuals can secure a financially stable future. It helps couples take advantage of tax-advantaged retirement accounts, even when one partner does not have earned income. Understanding how this strategy works, its benefits, and the rules involved is essential for making the most of retirement savings opportunities available to married couples.
Understanding the Nonworking Spouse Method
What Is the Nonworking Spouse Method?
The Nonworking Spouse Method refers to a retirement savings strategy where a working spouse contributes to an Individual Retirement Account (IRA) on behalf of their nonworking or low-income partner. While IRAs generally require the account holder to have earned income, a special rule under the IRS guidelines allows for spousal contributions as long as the couple files a joint tax return.
This method allows both spouses to build retirement savings even if only one spouse is employed. It helps increase total household contributions to retirement accounts, providing long-term financial security for both partners.
How It Works
When using the Nonworking Spouse Method, the working spouse can contribute to two separate IRAs their own and a spousal IRA. The contributions are based on the total household income and are subject to annual contribution limits set by the IRS.
The account must be in the name of the nonworking spouse, and they will be the legal owner of the account, even though the contribution is made from the household’s earnings.
Contribution Limits and Eligibility
Annual Contribution Limits
As of recent IRS guidelines, the maximum annual contribution for an individual to a traditional or Roth IRA is:
- $7,000 for those under age 50
- $8,000 for individuals aged 50 or older (including a $1,000 catch-up contribution)
Using the Nonworking Spouse Method, a couple could potentially contribute up to $14,000 (or $16,000 if both are over 50) per year, doubling their retirement savings potential.
Joint Income Requirement
To qualify, the couple must:
- Be legally married
- File taxes jointly
- Have enough earned income to cover both IRA contributions
For example, if a working spouse earns $100,000 annually, they can contribute the maximum amount to both their own IRA and their spouse’s IRA, assuming no other income limitations apply.
Traditional vs. Roth IRA Considerations
Traditional Spousal IRA
Contributions to a traditional IRA may be tax-deductible, depending on the couple’s income and whether the working spouse is covered by a retirement plan at work. The funds grow tax-deferred, and withdrawals during retirement are taxed as ordinary income.
Roth Spousal IRA
With a Roth IRA, contributions are made with after-tax dollars, and withdrawals during retirement are tax-free, provided certain conditions are met. Eligibility to contribute to a Roth IRA phases out at higher income levels. For spousal Roth IRAs, the couple’s Modified Adjusted Gross Income (MAGI) must be below specific thresholds to make full contributions.
Benefits of the Nonworking Spouse Method
Double the Retirement Savings
This strategy allows couples to contribute to two IRAs instead of just one, effectively doubling the amount saved annually. It’s especially beneficial when one partner leaves the workforce to raise children or care for a family member, ensuring their retirement savings continue to grow.
Improved Financial Security
By funding a spousal IRA, the nonworking partner builds their own retirement assets, offering greater financial independence and security in retirement. It also provides diversification in account ownership, which can be helpful for withdrawal strategies and estate planning.
Tax Planning Opportunities
Whether choosing a traditional or Roth IRA, couples can take advantage of tax benefits such as deductions or future tax-free income. Strategic contributions can help balance current tax liabilities with long-term tax-free growth, depending on their financial situation.
Common Scenarios Where It’s Useful
Stay-at-Home Parents
Many households have one partner stay at home to care for children. The Nonworking Spouse Method ensures the stay-at-home parent is not financially disadvantaged in the long run by continuing to build retirement savings.
Career Transitions
If one spouse takes a career break for education, health reasons, or a job change, this method allows continued retirement contributions during the non-earning period.
Early Retirement Planning
Couples seeking early retirement may benefit from using spousal IRAs to front-load their savings during high-income years, helping to achieve financial independence sooner.
Rules and Limitations
Income Thresholds for Roth IRA
The IRS sets income limits for Roth IRA eligibility. For married couples filing jointly, Roth IRA contributions begin to phase out at a MAGI of around $230,000 and are completely phased out at higher incomes (specific thresholds change annually).
No Contributions Without Earned Income
Although the nonworking spouse doesn’t need to earn income themselves, the working spouse must have enough earned income to justify both contributions. Passive income such as dividends or rental income does not qualify for this purpose.
Separate Accounts Required
The IRA for the nonworking spouse must be opened in their name, and contributions must be clearly documented as going into their individual account. The IRS does not allow joint IRA accounts.
How to Set Up a Spousal IRA
Steps to Open the Account
- Choose a financial institution such as a bank, brokerage, or credit union.
- Open a new traditional or Roth IRA in the nonworking spouse’s name.
- Contribute funds from household income up to the annual limit.
- Track contributions for tax reporting purposes.
It’s important to compare account fees, investment options, and customer service when selecting where to open the account.
Monitoring and Adjusting Contributions
Each year, couples should review their household income and tax situation to determine if they’re still eligible to contribute to both IRAs. Adjustments may be necessary due to changes in income, employment, or IRS contribution limits.
The Nonworking Spouse Method is a smart and often overlooked strategy for maximizing retirement savings as a couple. It allows the nonworking partner to grow individual retirement assets, maintain financial equality, and strengthen household security. Whether you’re planning for a temporary career break, managing a single-income household, or simply looking for ways to optimize savings, a spousal IRA can be an essential tool in your long-term retirement strategy. Couples should consider consulting a financial advisor or tax professional to ensure they use this method effectively and align it with their overall financial goals.