How Non-Working Spouses Can Save for Retirement

What would be more romantic than giving your non-working spouse the gift of future income? Providing them with financial security so they can enjoy their later years…..priceless! This might sound like a fairytale but it’s true. Working spouses can provide non-working spouses with investment accounts that will set them up financially during their “retirement age” years.

Employers have come a long way from the old school pension model and now most provide some sort of retirement account, like a 401(k). Employees now have the freedom to determine their retirement savings and investments. But what if you are a non-working partner or spouse? Or your partner is sort of non-working but has a side hustle that earns some income? How do they prepare for retirement? Typically you need to have earned income to contribute to retirement accounts, such as IRAs or Roth IRAs, but there is an exception for non-working spouses.

Retirement Account Options

Some refer to it as a “Spousal IRA” but it’s really just a Traditional IRA. They have the same rules and tax benefits, and are very beneficial to those partners not working outside the home, if they file jointly. These IRAs are in the non-working spouse’s name and funded by the working spouses earned income. Check with a CPA, but contributions to these accounts may even be tax deductible depending on a few factors. Even if they aren’t tax deductible now, they ARE tax-deferred. This means you pay no taxes on earnings or gains in your IRA until you pull the cash out during retirement. What’s the draw back to a Traditional IRA? There are contribution limits set by the IRS each year. For 2023 the IRA contribution limit is $6,500 if you’re under age 50 and $7,500 if you’re 50+.

Another option is a Roth IRA. This has the same contribution limits as a Traditional IRA, but has one huge benefit other retirement accounts can’t touch. When you withdraw cash from your Roth IRA in retirement, after age 59 1/2, it’s all tax free. Who doesn’t love that word – free?! If you don’t see a tax benefit to contributing to a Traditional IRA now, then you might as well take advantage of the Roth IRA. Depending on the working spouses income, there may be a limit to how much you can contribute to a Roth IRA. If a couples joint income is too high, there may be an opportunity to still contribute via a “backdoor Roth” contribution. These can be tricky and should be discussed with a financial professional to avoid any tax issues.

Self-employed Spouses

What if your non-working spouse has their own side gig or helps the working spouse with their business? Then the options open up more and greater savings can be made. They could open a SIMPLE IRA, SEP IRA or a solo (individual) 401(k). All of these options boost savings significantly more than the Spousal IRA or Roth IRA, with the SEP IRA and solo 401(k) being the greatest – up to $66,000 in 2023. Not only are contributions to these accounts helping your future self, they are helping your current self by possibly reducing your taxable 1099 income. We wrote a whole blog about retirement accounts for business owners you can find here.

Why Does it Matter?

While your spouse may not be working outside the home, they are most certainly still working. It’s just not in a capacity that society recognizes and financially rewards. Just as working spouses are saving retirement nest eggs, so should the non-working spouses. Being able to plan for their future with the joint income brought into the house can greatly increase the overall future wealth of the couple.

Consider this example. By saving $6,000 each year for 30 years, at 5% interest, you’ll have more than $400,000 saved for retirement. Add this to what the working spouse saves for retirement and it could mean a big difference. Even the possibility of an early retirement for the working spouse.

Have questions about how to open one of these accounts and start saving? We’re happy to have a conversation about what’s best for you and your partner. We’d love to make work optional for both of you, much sooner than you may have thought possible.

M & A Consulting Group, LLC, doing business as CAM Investor Solutions is an SEC registered investment adviser. As a fee-only firm, we do not receive commissions nor sell any insurance products. We provide financial planning and investment information that we believe to be useful and accurate. However, there cannot be any guarantees. 

This blog has been provided solely for informational purposes and does not represent investment advice or provide an opinion regarding fairness of any transaction. It does not constitute an offer, solicitation or a recommendation to buy or sell any particular security or instrument or to adopt any investment strategy. Past performance is not a guarantee of future results. Diversification does not eliminate the risk of market loss. Tax planning and investment illustrations are provided for educational purposes and should not be considered tax advice or recommendations. Investors should seek additional advice from their financial advisor or tax professional.