Debunking Common Misconceptions about Roth IRAs: A Closer Look at 5 Prevalent Myths
Investing in retirement accounts can be a smart move for many, and Roth IRAs are no exception. These accounts offer tax-free growth and withdrawals under certain conditions, making them an attractive option for young workers and those expecting their income to increase over time.
One of the lesser-known benefits of Roth IRAs is the ability for non-working spouses to contribute to them, thanks to what is known as a "spousal IRA." This allows a non-working spouse to open and contribute to a Roth IRA using their working spouse's earned income as the basis for the contribution.
To qualify, the working spouse must have sufficient earned income to cover the total contributions for both spouses. The couple must also file a joint tax return. Contributions are limited by the couple's modified adjusted gross income (MAGI). For 2025, married couples filing jointly can each contribute the full amount if their MAGI is below $236,000. Above this, contribution limits are phased out and disallowed above $246,000. Each spouse has their own contribution limit, which for 2025 is up to $7,000 each under age 50, or $8,000 if age 50 or older.
Roth IRAs offer more flexibility compared to some other investment options due to the ability to withdraw contributions without penalties under certain conditions. However, earnings from a Roth IRA may be subject to taxes and penalties if money is withdrawn before age 59 1/2 or before the account has been open for five years.
It's important to note that the income limits for a full Roth IRA contribution for married filing separately are not eligible. Also, a new "10-year rule" applies to most non-spouse beneficiaries, requiring them to fully withdraw the inherited Roth IRA balance within 10 years of the account holder's death.
Surviving spouses, individuals less than 10 years younger than the account holder, disabled or chronically ill beneficiaries, and minor children are considered eligible designated beneficiaries and are exempt from the 10-year rule.
Roth IRAs can be complex, but they offer significant tax advantages, especially for those expecting higher taxes in retirement. High earners can bypass Roth IRA income limits by transferring funds from a traditional IRA, paying taxes, and rolling them into a Roth IRA.
In conclusion, a non-working spouse can indeed have a Roth IRA in their own name and contribute to it, based entirely on their spouse's income, assuming eligibility criteria are met. It's a valuable opportunity for those who may not be earning an income but can still benefit from the tax advantages of a Roth IRA.
Data source for the income limits mentioned in this article is Vanguard.
[1] Vanguard. (2023). Roth IRA Contribution Limits. Retrieved from https://investor.vanguard.com/retirement/roth-ira/contribution-limits [2] IRS. (2023). Spousal IRAs. Retrieved from https://www.irs.gov/retirement-plans/plan-sponsor/retirement-topics-spousal-iras [3] Fidelity. (2023). Roth IRA Contribution Limits. Retrieved from https://www.fidelity.com/learning-centre/personal-finance/retirement/roth-ira/roth-ira-contribution-limits [4] TD Ameritrade. (2023). Roth IRA Contribution Limits. Retrieved from https://www.tdameritrade.com/retirement/roth-ira/roth-ira-contribution-limits.html [5] Schwab. (2023). Roth IRA Contribution Limits. Retrieved from https://www.schwab.com/resource-center/retirement/roth-ira/roth-ira-contribution-limits
- The tax advantages of Roth IRAs can extend to non-working spouses, as they can contribute to their own Roth IRA using their working spouse's earned income, a strategy known as a "spousal IRA."
- For young couples who anticipate their income to increase over time, investing in Roth IRAs can be a wise choice due to their tax-free growth and withdrawals under certain conditions, especially for the non-working spouse.
- In the realm of personal finance, Roth IRAs offer added flexibility, as contributions can be withdrawn without penalties under specific conditions, making them a valuable option for those looking to plan for their retirement and navigate their financial future.
