Introduction
Retirement planning can be daunting, especially for non-working spouses who may not have access to employer-sponsored retirement plans. However, there is a retirement savings option available for non-working spouses: the Roth IRA.
In this panel discussion, we will explore what a Roth IRA is and how it works, as well as the benefits of opening one for non-working spouses.
What is a Roth IRA?
A Roth IRA is an individual retirement account that allows you to save after-tax dollars. Unlike traditional IRAs, which require you to pay taxes on withdrawals during retirement, qualified withdrawals from a Roth IRA are tax-free.
How does a Roth IRA work?
Contributions to a Roth IRA are made with after-tax dollars. This means that you do not get an immediate tax deduction on your contributions like you would with traditional IRAs or 401(k) plans. However, any earnings in your account grow tax-free and qualified withdrawals are also tax-free.
To be eligible to contribute to a Roth IRA, you must have earned income (such as wages or self-employment income). Additionally, there are income limits for contributing: in 2021, if your modified adjusted gross income (MAGI) exceeds $208,000 (for married filing jointly) or $140,000 (for individuals), you cannot contribute directly to a Roth IRA.
However, there is an option for high-income earners: the backdoor Roth conversion. This involves making nondeductible contributions to a traditional IRA and then converting those funds into a Roth IRA.
Why should non-working spouses open a Roth IRA?
For non-working spouses who don’t have access to employer-sponsored retirement plans like 401(k)s or pensions, opening a Roth IRA can provide valuable long-term savings opportunities. It’s important for both partners in marriage or partnership to think about saving for their future together – even if only one of them has current earned income – since they will need to rely on those savings in retirement.
Another benefit of a Roth IRA is that it can be used as an emergency fund. Contributions (but not earnings) can be withdrawn at any time without penalty or tax, which makes the account more flexible than other retirement accounts.
How much can non-working spouses contribute to a Roth IRA?
The contribution limits for a Roth IRA are the same for both working and non-working spouses: up to $6,000 per year ($7,000 if aged 50 or older). However, there are income limits that may affect how much you can contribute.
If you’re married filing jointly and your MAGI is less than $198,000 in 2021, you can contribute up to the full amount. If your MAGI is between $198,000 and $208,000, your contribution limit will gradually phase out. If your MAGI exceeds $208,000, you cannot contribute directly to a Roth IRA.
For single filers or heads of household with a MAGI below $125,000 in 2021, the full contribution limit applies. Between $125k-$140k contributions phase out gradually while above this amount disqualifies one from making contributions directly into their Roth account.
What investments should non-working spouses choose for their Roth IRAs?
When opening a Roth IRA – like any investment account – it’s important to consider your risk tolerance and investing goals when choosing investments. This means taking into consideration factors such as age and desired rate of return when selecting assets that align with personal financial plans.
Some common types of investments include mutual funds or exchange-traded funds (ETFs), individual stocks/bonds; target-date funds; real estate investment trusts (REITs); certificates of deposit (CDs).
It’s also important to note that while each asset class carries different levels of risk-reward profiles some assets classes like CDs offer very little returns but come with lower risk levels.
How can non-working spouses manage their Roth IRA investments?
Managing your Roth IRA investments is an ongoing process. It’s important to review your portfolio regularly and rebalance as necessary to ensure that it aligns with your financial goals and risk tolerance.
There are many online resources available to help you stay informed about the performance of your investments. Most brokers also offer tools like investment calculators, which can help you determine how much you need to save each month in order to reach your retirement savings goals.
What should non-working spouses consider when opening a Roth IRA?
When opening a Roth IRA, there are several things that non-working spouses should consider:
– Eligibility criteria for contributions
– Contribution limits
– Investment options
– Risk tolerance and investing goals
– The potential for future tax-free income
It’s also important to research different brokerage firms before choosing one. Factors such as fees, account minimums, customer service, investment options, and user experience may vary between firms.
Conclusion
Opening a Roth IRA can be an excellent way for non-working spouses to save for retirement while benefitting from tax-free earnings on qualified withdrawals. With careful planning and management of investments throughout the course of one’s working life starting early enough then saving enough will not be burdensome even without earning any wages.