How Can a Nonworking Spouse Plan for Retirement?

Dear Carrie,

I'm 65 and my husband is 60. We're trying to plan for retirement. My husband isn't working and doesn't have a retirement account. I'd like to keep working for a few more years. Here are my questions: Can I open an IRA for him? Can he receive Social Security benefits on my work record? And do I have to retire for him to be eligible?

—A Reader

Dear Reader,

These are three great questions, so thanks for asking. While each couple's situation is different, there are ways to build retirement security for a nonworking spouse that every couple should be aware of—and take advantage of if they can. Let's go in order.

#1: Yes, you can open and fund a spousal IRA

Usually you have to have earned income to open and fund an IRA, but not with a spousal IRA. If you're married filing a joint tax return, you can contribute funds into two separate IRAs—one for your nonworking spouse and one for you—as long as you have enough earned income to cover both contributions.

Since you’re both over age 50, you can currently contribute up to $7,000 ($6,000 plus a $1,000 catch-up) into each account. You'd just have to have earned income of $14,000 or more to max out both contributions.

Tax deductibility is another issue. Contributions to a traditional IRA may be fully tax-deductible. However, if you participate in a 401(k) or pension plan at work, and earn more than $125,000 in 2021 ($129,000 in 2022), contributions to your own or to a spousal IRA aren't tax deductible. If your contributions are tax-deductible, you'll pay ordinary income taxes on withdrawals come retirement. 

If you're not concerned about tax deductibility, you might want to consider opening a spousal Roth IRA, as long as you meet the income limits (under $198,000 in 2021; under $204,000 in 2022). The advantage of a Roth is that, although you don't get an upfront tax deduction on a contribution, withdrawals of earnings are tax-free if you're over 59 1/2 and you've held the account for at least five years. That could be important since you're close to retirement. So before you open a spousal IRA, you might want to talk to your tax advisor.

#2: Yes, your spouse can collect Social Security benefits on your work record

The short answer to your next question is yes, a nonworking spouse who has reached age 62 can collect Social Security benefits based on the working spouse’s earnings record once the working spouse has filed for benefits. So, in your situation, if you filed for benefits at your full retirement age (66 and 4 months if you turned 65 this year) your husband would be able to file for benefits on your work record as early as age 62. 

But before you proceed, there are some important rules and exceptions to think about.

• The maximum Social Security benefit of a nonworking spouse is up to 50 percent of the working spouse’s benefit at FRA. So if, for example, your FRA benefit is $2,000/month, your spouse would be able to collect up to $1,000 at his FRA.
• If you were to file for benefits before reaching your FRA, your own benefit would be reduced, but it would not impact the benefit amount of your spouse. Spousal benefits are based on the projected FRA benefit, not on the actual benefit taken.
• BUT, if a nonworking spouse files for the spousal benefit before their own FRA, that benefit would be reduced accordingly. For instance, your husband's FRA is 67 based on his age. If he filed for a spousal benefit at 62, his monthly benefit would be permanently reduced by 32.5 percent. 

For the record, there is an exception to the age requirement if your spouse is caring for your child who is under age 16. Also note that there's no advantage for your husband to postpone filing beyond his FRA. Unlike the worker’s benefit, which continues to increase until age 70, spousal benefits max out at FRA. As you can see, nothing is cut and dried!

#3: No you don't have to retire, but timing is extra important

To answer your third question, you don't have to officially retire for your husband to collect Social Security on your work record, but you do have to file for your own benefits for him to be eligible. And here's where you need to be extra thoughtful.

Deciding when to take Social Security is important because it not only affects your own benefits, but also survivor benefits. (Survivor benefits are up to 100 percent of the highest earning spouse's benefit depending on when the survivor claims.) As I mentioned, when you file for Social Security before your FRA, your benefits are reduced permanently. Plus it would reduce his survivor benefits should he outlive you.

On the flip side, your benefits will go up approximately 8 percent a year for each year you wait past your FRA, up to age 70. Again, that affects only the amount of your own benefit, not the spousal benefit.

Here are some things to consider as you make your decision:

• If you wait until you reach your FRA to file, you'll increase your benefit and the potential survivor benefit for your husband.
• At your FRA, you can continue to work with no deductions to your own benefit.
• If you can hold off even longer—until age 70—you'll receive the highest possible retirement benefit for yourself and the highest possible survivor benefit for your husband, but it won't increase the spousal benefit. And your husband would also have to wait to file.

Of course, your health, other available resources, and desire and ability to continue to work are also relevant. So as you can see, it can get complicated. To help you decide what’s best, I suggest you consult a financial advisor who can help you explore different Social Security claiming strategies.  

Bottom line

It's definitely possible to build retirement security for a nonworking spouse. But how you go about it can impact the overall retirement strategy for both of you. Talk together. Plan together. Check in with an advisor for extra help. And take full advantage of everything you can.

Have a personal finance question? Email us at askcarrie@schwab.com. Carrie cannot respond to questions directly, but your topic may be considered for a future article. For Schwab account questions and general inquiries, contact Schwab.