NORFOLK, Va. - May 17 is the last day to be able to put money into a spousal IRA for last year.
Carl Carlson, CEO and Founder of Carlson Financial, said that less than 15% of the people they see who should be putting money into a Spousal IRA are that it even exists.
Three key things to know about Spousal IRAs are: When might it occur, the type of IRA to fund and how to fund it.
One, a spousal IRA is only something you use if one spouse isn’t working. Maybe your spouse retired earlier than you, or maybe your spouse has decided to stay home to raise kids or take care of the home front, or maybe your spouse is just temporarily out of a job or back in school or still in school, Carlson said.
There are a lot of circumstances that could trigger it, and it seems like many of these might be hard to catch because they occur around some major life changes. So, Carlson said now that we can recognize when it might occur, the second key is to determine whether to go with a traditional or Roth IRA.
With the traditional IRA you get a tax deduction so it could lower your tax bill or increase your refund come May 17. But Carlson said not to forget that these taxes are not going away; they are only deferred, and you will eventually pay the tax on the contribution plus all the growth. But with the Roth IRA, you don’t get to deduct the contribution now, but the money grows tax free and you can eventually take the money out tax-free.
When deciding which to use, most people should seek out the advice of a professional financial advisor that does comprehensive ongoing planning for their clients including income tax planning. But in general, Carlson said that if only one spouse is working than it is likely that your income may be lower than normal so that would suggest using the Roth IRA.
Carlson added, just to confuse things, there is no such account called a “spousal IRA" - it’s just a normal IRA or Roth IRA in the spouse’s name.
The third point about how to fund it is to take the money out of what you made for the year but Carlson said often when only one spouse is working it may be more difficult to do that. So, he suggests that if you have savings or investments in a normal account then just move them over into the type of IRA you have chosen. This is money you are already paying taxes on the interest or the dividends or the capital gains.
And if you moved it over into the Roth IRA, you could have it grow tax free and take the money out tax-free any time for the rest of your life as long as you have owned the Roth for over five years.