IRA Spousal Contributions May Help Close the Retirement Savings Gender Gap
By Christle Johnson, QKA, CIP
Your clients who are women face a special retirement savings challenge: on average, they earn less and have fewer years with earned income compared to men. Gender may account for some of the differences in the types of jobs that men and women take—and associated wages they earn. But more women than men also take multiple breaks from work during their lifetime, or turn down work promotions because of family care decisions.
Because those on a break from work often forfeit a paycheck during that period, they are less likely to be setting aside money in an IRA or contributing to an employer-sponsored retirement plan. This sets back many women (and men who take career breaks) in financially preparing for retirement. But for those clients without their own income who are married, the option of making “spousal contributions” to a Traditional or Roth IRA may help them save for retirement.
The Cost of a Career Break
A study by the Washington-based Institute for Women’s Policy Research, The Slowly Narrowing Gender Wage Gap, measured the earnings of workers over a 15-year period (2001‒2015). It found that the cost of not working continuously can be significant. Women who took just one year off from work during that time had 39 percent lower average annual earnings than women who worked all of the 15 years. The proportional earnings loss for male workers was similar. The study showed a key difference, however: the number of women taking at least one year off of work during the 15-year period is nearly twice the rate of men—43 percent of women compared to 23 percent of men.
IRA Spousal Contribution
Married women—or men, for that matter—who take work breaks could potentially stay on track or experience smaller setbacks in meeting their retirement savings goals by making IRA contributions based on their working spouse’s income. Clients who choose this route will need to meet these requirements.
The couple must file a joint federal income tax return.
The working spouse must have enough earned income to make any IRA contributions on behalf of the nonworking spouse; if both spouses are contributing, there must be enough income to support both spouses’ contributions.
Assuming enough earned income, each spouse can contribute up to the annual statutory limit ($6,000, plus $1,000 if turning age 50, for 2019 and for 2020). This limit applies to Traditional and Roth IRA contributions combined.
To be eligible for Roth IRA contributions, the couple must also satisfy income requirements, explained next.
Roth IRA Contribution Income Restrictions
The amount that an individual is eligible to contribute to a Roth IRA depends on the amount of the couple’s modified adjusted gross income (MAGI) (see IRS Publication 590-A, IRA Contributions). If the couple’s joint MAGI for a tax year is less than the IRS phase-out range for the year, each spouse can make the maximum Roth IRA contribution allowed for that tax year (assuming enough MAGI to support both spouse’s contributions). If it’s above the phase-out range, neither spouse is eligible to contribute to a Roth IRA. If the couple’s joint MAGI falls within the phase-out range, their maximum contribution amount is reduced.
Traditional IRA Contribution and Income Tax Deduction
The ability to take a federal income tax deduction for a Traditional IRA contribution—if eligible—appeals to many savers and is another way for nonworking married individuals to potentially benefit when saving for retirement with an IRA. But deduction eligibility depends on whether either spouse is an “active participant” in an employer-sponsored retirement plan. An active participant generally is making or receiving contributions to a retirement plan account(s) for the applicable year. Because active participants have access to a workplace retirement plan, the IRS uses their MAGI—and phase-out ranges, as with Roth IRAs—to determine whether each spouse can take a full deduction, a partial deduction, or no deduction at all. Keep in mind that those unable to claim a tax deduction could still make a nondeductible contribution to a Traditional IRA.
No Minimum Contribution Amount
Regardless of which IRA a couple chooses to make spousal contributions to, the main thing is to contribute—even if it’s a small amount. There is no minimum amount that must be contributed to either type of IRA. Couples can contribute whatever they’re comfortable with, up to the previously described limits.
While making spousal contributions to an IRA can be advantageous to either spouse, the realities of today’s U.S. workforce and family dynamics suggest it will be most beneficial to women, since they—more often than not—are the ones likely to experience a retirement savings shortfall.
