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.
A non-working client may be eligible for Social Security benefits during retirement regardless of whether he or she has ever earned income. This spousal benefit can be up to 50% of the working spouse’s benefit if the non-working spouse waits until full retirement age to claim. Otherwise, the percentage is reduced based on the number of months remaining until the non-working spouse reaches full retirement age.
It is also possible that the non-working spouse actually did have enough earned income to qualify for traditional Social Security benefits, but those benefits may be less than the 50% spousal benefit. In this case, that spouse is eligible for the higher level benefit, but it will be made up of a combination of the non-working spouse’s own benefit and a portion of the spousal benefit—the full amount of both benefits cannot be claimed.
Even if the working spouse is not ready to claim benefits—perhaps because he or she is waiting to claim a higher level of benefits at an older age or is still working—the non-working spouse can claim spousal benefits using the file and suspend strategy. The file and suspend strategy can allow a non-working spouse to begin collecting spousal benefits without jeopardizing the working spouse’s full retirement benefit. The working spouse can simply file for benefits and then make a subsequent filing to suspend these benefits.
Retirement planning for non-working spouses is an area that is often overlooked—but proactively planning for a non-working spouse’s secure retirement is one important aspect of maximizing the entire household’s retirement, making it crucial that advisors take the first step in suggesting a plan.
Originally published on Tax Facts Online, the premier resource providing practical, actionable and affordable coverage of the taxation of insurance, employee benefits, small business and individuals.
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