Tax and Retirement Planning for Families with a Stay-at-Home Spouse

In many families, one of the spouses stays home, often to care for children and the household. This may be hard work, but for tax purposes the contributions of the stay–at–home spouse are not recognized in the same way as they are for individuals with earned income. If your wife or husband does not have paid employment, your family may have to do some additional planning to minimize your tax bill, while ensuring that you are saving enough for retirement to cover the needs of both partners.

Even if your husband or wife has not earned a significant amount of income through paid employment, he or she may be entitled to a Social Security spousal benefit. Based on the working spouse's earnings record, the spousal benefit can be claimed after the working partner has filed for benefits and the nonworking partner has reached retirement age. The spousal benefit generally amounts to 50% of the monthly Social Security payment received by the spouse who worked regularly, or less if claimed early.

But Social Security benefits alone are unlikely to cover the needs of most couples in retirement. Thus, your family's retirement strategy should include a plan for both partners, even if you are the sole earner. If you have not done so already, consider making the maximum contribution to your employer–sponsored 401(k) plan. While your nonworking partner is not permitted to contribute to your workplace retirement plan, the annual contribution limit in 2019 is $19,000, or $25,000 for individuals age 50 and over. The funds in the account will be held in your name, but can be inherited by your spouse, and are typically divided between the spouses in the event of a divorce.

Another option for tax–advantaged retirement savings is a spousal IRA, which is simply a regular IRA designed specifically for spouses who are not employed or are working too little to contribute to a qualified retirement account. While it is a fundamental rule that individuals need to have earned income, or wages, in order to contribute to an IRA, a nonworking spouse is permitted to open an account to which the working spouse may contribute. Provided you file a joint return, you are permitted to contribute up to $6,000 (or $7,000 for those age 50 and older) in 2019 to an account in your partner's name, while also contributing the same amount in your own IRA. Thus, your household may be eligible to contribute up to a total of $12,000 or $14,000 to two separate IRA accounts.

A spousal IRA can be a traditional IRA or a Roth IRA. The traditional IRA is tax–deferred, which means that you won't pay income taxes on current contributions, but you will owe taxes on distributions in retirement. By contrast, Roth IRA contributions are made with after–tax dollars, but the funds in the account grow on a tax–deferred basis and can be withdrawn tax free in retirement.* Thus, a Roth IRA may be an attractive option if you expect to be paying higher tax rates in retirement or wish to leave an IRA to beneficiaries. However, in 2019 the eligibility for contributing to a Roth account starts to phase out for married couples with a modified adjusted gross income (AGI) of $193,000, and is capped at $203,000.

It is also important to keep in mind that the deduction for taxpayers making contributions to a traditional IRA is phased out for married couples filing jointly when the spouse who makes the IRA contributions is covered by a workplace retirement plan. While the modified AGI phase–out range is $103,000 to $123,000 in 2019 for the spouse who is employed, it is raised to $193,000 to $203,000 for an IRA contributor who is not covered by a workplace retirement plan and is married to an individual who is covered.

Married couples in which one partner owns a business or is self-employed have additional options for saving for a stay–at–home spouse's retirement. For example, if you own a business, your partner may be able to provide services to your company, such as bookkeeping or answering calls, while still remaining primarily at home.

If you pay your partner as an employee, he or she can qualify to participate in the company's retirement plan. This approach can lower your family's current income tax bill, while helping to secure your financial future as a couple.

*Unless certain criteria are met, Roth IRA owners must be 59 or older and have held the IRA for five years before tax–free withdrawals are permitted.



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