Hi guys, it’s Finance Fridays and I’m going to talk about what a Spousal IRA is.

For those who were keeping track, this is kind of out of order. I was supposed to talk about Backdoor Roth IRAs today. However, I felt it was more important to talk about Spousal IRAs for those who don’t know about them.

Stock Photo from: Pixabay

One of the major benefits of having both partners in a marriage work is that you are both able to put away money into a 401k/403b and 457. This could effectively double how much money you put away for retirement. However, for some medical couples, there may be a stay-at-home mom or stay-at-home dad.

This may be somewhat of disadvantage savings wise since having only one income limits you to the single $18k employee contribution. That’s where a Spousal IRA comes into effect, to help even the playing field a little.

What is a Spousal IRA?

Normally, in order to contribute to an IRA you must have an earned income. But for a spouse who has low or no “earned income”, the spouse with an earned income can make a contribution to the Spousal IRA on their behalf. Please note that the working spouse’s income must equal or more than the total IRA contributions made on behalf of both spouses. (usually not a problem)

Additionally, the couple must be married, filing a joint tax return.

A Spousal IRA can be either a Traditional IRA or Roth IRA and has the same restrictions. However, a spousal IRA can not be held jointly, it must be held solely in the name of the spouse who does not have an “earned income”. However, when dispersed in retirement the money can be used together by couple.

So what is the limit?

The limitation is the same as a Traditional IRA or Roth IRA, which is $5500 for those less than 50 yo and $6500 for those older than 50 yo.

That isn’t very much…

Well, it may not seem like much, but it’s better than nothing at all. Additionally. it’s not bad if it’s the Roth version since that is post-tax and grows tax-free.

Let’s do some quick math so I can try to convince you:

from 30 yo to 50 yo, you make the $5500 contribution a year for your spouse.

Compound Interest Calculator – $1, $458/month ($5500/year), 20 years, 6% interest, compounded annually and you get:

$202,176.82

Then from 50-65, you make the $6500 contribution a year for your spouse.

Compound Interest Calculator – $202,176.82, $541/month ($6500/year), 15 years, 6% interest, compounded annually and you get:

$887,220.51

More than you thought right? What’s even better is that the tax has already been paid on it, so when you withdraw it in retirement, it’s tax-free.

Is there any other option?

Well, if your spouse worked part time and had access to the company 401k, then he/she should try to work enough to maximize the employee contribution of $18k, hopefully with some form of a match.

Then if he/she made a little more, instead of doing a Spousal IRA, he/she could also do a Backdoor Roth IRA.

Alternatively, if you had your own side business and your spouse works for you, then he/she would have access to that company 401k. Then you could do some variation of the above, depending on how your company 401k is set up.

Tell me more about Backdoor Roth IRAs…

I will go over Backdoor Roth IRAs in more detail next Friday (I promise!), but now you can really see the power in Backdoor Roth IRAs and why it’s worth it to do it every year, for both if possible.

It’s basically a way for high income earners to get the benefits of the Roth IRA, even though we technically don’t qualify under normal circumstances.

Let’s just do the math again to illustrate… instead of $5500 a year, you are able to both put away $5500 a year, so $11000 a year (post tax).

from 30 yo to 50 yo, you contribute $11000/year ($5500 each)

Compound Interest Calculator – $1, $916/month ($11000/year), 20 years, 6% interest, compounded annually and you get:

$404,350.43

Then from 50-65, you contribute $13000/year ($6500 each)

Compound Interest Calculator – $404,350.43, $1083/month ($13000/year), 15 years, 6% interest, compounded annually and you get:

$1,271,543.84

Remember, this is all post-tax, so when you withdraw from it in retirement, it’s tax-free.

Unfortunately, for me, I’ll be starting the Backdoor Roth IRA late. I should have started the first year as an attending, but like many things, it fell by the wayside. Now, here I am 3 years an attending and I still haven’t done it yet. Nonetheless, better late than never.

Both my wife and I will be doing it this year, and every year after that until we retire.

So when I retire, I’ll have a combination of pre-tax (401k/403b) and post-tax (Roth IRA) retirement dollars?

Yes.

If you’ve been following my blog from the beginning you will have been maximizing your 401k/403b and 457 from the beginning or are in a partnership setting saving $53k (now $54k) a year. You should have significantly more pre-tax retirement money (401k/403b) than post-tax retirement money (Roth IRA).

So when you retire, you will need to be more efficient in how you withdraw from both accounts in order to keep your “taxable income” down. This of course will be different based on how much you have in each account and how much you plan to withdraw a year. A long, complex post for another time.

How do your plans for retirement look?

Currently:

I contribute $18k to my TSP and am matched ~$16k = $34k

My wife contributes $18k to her 403b (unmatched) and an additional $18k to her 457 (also unmatched) = $36k

Plan for Backdoor Roth IRA for both, $5500 each, so $11k.

Total: $70k in pre-tax and $11k in post-tax retirement accounts for the year.

This, or something similar to this, is my plan for the remainder of our careers.

This isn’t bad, but I wish it was more. Like I’ve said time and time again, just by virtue of being a doctor, we are way behind when it comes to saving for retirement. I really wish I had put more money into a Roth 401k/403b as an intern/resident/fellow. However, that is an opportunity missed and time (and compound interest) I’ll never get back. I recommend reading Talking to Med Student Me for more background.

I think I’ll talk about Roth 401k/403bs this next Medicine Mondays. Although it is mostly a Finance Fridays type of thing, it really belongs in Medicine Mondays because it is one of the few advantages we as doctors have as residents that many don’t take advantage of.

Learn from my mistakes.

TL;DR

Spousal IRAs allow you to make contributions to an IRA for your spouse who has no earned wages. You must file jointly.

Restrictions are similar to a Traditional IRA and Roth IRA.

$5500 (at < age 50) and $6500 ( at > age 50) may not seem like much, but if you do it for 30+ years, it is significant.

In my opinion, Backdoor Roth IRAs are essential for physicians after maximizing 401k/403b and 457 options.

My biggest missed opportunity was not contributing to a Roth 401k/403b during residency, stay tuned for this Medicine Mondays post for calculations.

-Sensei

What do you think? Did you know about Spousal IRAs?

Will you be making Spousal IRA contributions?

Questions, Comments and Suggestions are welcome.

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