A spousal IRA can trigger the magic of marital financial planning

UBS conducted a study last year and shared that only 20% of couples are equally involved in financial decisions. Among more than 70% of millennial women (those born between the early 1980s and the 1990s) defer to a spouse for financial decision making. Nearly 95% of millennial men would like a spouse to be more involved in this area.

Several reasons are cited in studies to explain why some married women participate so little in the financial planning process. Research cites lack of trust, entrenched roles, complacency and peacekeeping as some of the main reasons.

If lack of investment experience is a problem for women, it should be addressed. Demographics remind us that women generally live longer than men. Also, women more than men can suddenly take on caring roles. The COVID-19 pandemic shows how quickly the landscape of family wellbeing can change. A marriage partner as caregiver can be overwhelmed when taking the initiative to also be the financial decision maker in such circumstances.

Awareness of personal financial decision-making within the Department of Defense and federal agency communities can arise from how the knowledge necessary to do so is acquired. Military and federal employees receive orientation on the Thrift Savings Plan (TSP) and other benefits such as insurance and pensions during working hours at the workplace. This arrangement prevents the spouse from sitting at the table. Some military and federal agencies allow spouses to attend retirement seminars for a soon-to-retire military or federal employee. In my experience, this spousal attendance is usually extremely low.

People with earned income can fund an IRA. Those earning over $6,000 can invest up to $6,000 in an IRA and for those age 50 or older, an additional $1,000 can be contributed from earned income totaling at least 7 $000. But what about a person who earns nothing or less than the thresholds of $6,000 or $7,000?

Individual spousal retirement plans (IRAs) may be a solution — not the solution — to greater partnership between spouses in the financial planning process.

A spousal IRA account can be created in the name of a spouse who earns nothing up to less than $6,000 or $7,000 if age 50 or older. This is an exception to the rule that a person must have enough earned income to contribute to an IRA. The named spouse is the owner of the IRA account, regardless of the federal employee’s income. Couples who file separate tax returns are not eligible to contribute to a spousal IRA. Only those who file a joint tax return for spousal IRA eligibility.

Spousal IRAs have the same contribution limits as regular IRAs. For 2021 and 2022, that would be $6,000 per person plus an additional $1,000 for those age 50 or older. A choice exists between a traditional IRA or a Roth IRA.

My rationale for believing that spousal IRAs would be a step towards greater mutual financial planning for married couples is based on the role of ownership. The relationship between the banks or brokers holding the IRA accounts with the spouses relates to ownership responsibilities. Many brokerage firms and banks offer participants excellent educational materials on investments. Topics range from portfolio rebalancing to risk analysis to behavioral finance. Asset allocations, beneficiaries, and withdrawal decisions are made by the spouses who own the IRA accounts. I believe spousal IRA enrollments will increase the interaction of financial planning within marriages because of the mechanics of spousal IRA ownership.

IRA ownership inspires confidence and provides an increased sense of security for the future. Such a property alters our feelings by providing a sense of control. Stewardship accompanies the property. The result is an increased awareness of financial planning.

It may not be too late for spousal IRAs for 2021. IRA contributions can be made before taxes are filed for that tax year.

A traditional IRA for the spouse who does not work or earn income is possible if the other spouse works for the federal government. Since all federal employees have a retirement plan, however, a tax deduction may not be fully deductible for traditional IRAs. When the couple files a joint return and their modified adjusted gross income (MAGI) is between $198,000 and $208,000, the tax deduction is phased out for the 2021 tax year. For the 2022 tax year, the phasing out will occur between $204,000 and $214,000.

A spouse of a federal employee can also own a Roth IRA. Married couples who file a joint return with a MAGI of up to $198,000 may consider a Roth IRA for the spouse who is not a federal employee. Partial contributions to the Roth IRA are permitted when the MAGI is between $198,000 and $208,000 for the 2021 tax year. Roth IRAs are permitted below $204,000 for 2022, with a tiered window being modified from $204,000 to $214,000.

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