Retirement | November 1, 2016

Yes, There are Retirement Benefits for a Nonworking Spouse

Key Points

  • A spousal IRA allows a worker to make IRA contributions for his or her nonworking spouse. 

  • A nonworking spouse is entitled to a Social Security benefit of up to 50 percent of the earner’s benefit.

  • If you or your spouse files for Social Security benefits early, your benefits will be permanently reduced.

Dear Carrie,

My husband and I are both 62 and trying to prepare for retirement.  He was a stay-at-home dad (no paycheck and no retirement account) and I plan to continue working for at least another five years.  Can I now open an IRA for him?  Also, can he receive Social Security benefits on my work record? Do I have to retire for him to be eligible?

—A Reader

Dear Reader,

These are all great questions, so thanks for asking. Let’s go in order:

You can fund a spousal IRA

One of the best deals around for a nonworking spouse is a spousal IRA. If you're married filing your tax return jointly, you can contribute funds into two separate IRAs—one for him and one for you—as long as you have earned income equal to both contributions.

Since you’re both over age 50, you can currently contribute up to $6,500 ($5,500 plus $1,000 catch-up for those over 50) into each account. In this case, you would have to have earned income of $13,000 or more to cover both contributions.

Tax-deductibility is another issue. If you participate in a 401(k) or pension plan at work, and earn more than $184,000, your contributions to a spousal IRA are not fully deductible. If you earn more than $194,000, they are not deductible at all. (And tax deductibility for contributions to your own IRA will be phased out between $98,000 and $118,000 of income).

I do want to mention one caveat, however, especially appropriate for someone approaching retirement. Withdrawals from a traditional IRA are taxed at your ordinary income tax rate. On the other hand, withdrawals from taxable accounts are taxed as capital gains (with a preferential rate for investments held for more than one year).

Therefore, depending on your personal tax rate and the length of time you plan to hold your investments, it might make more sense for you to invest in a taxable account rather than an IRA. Alternatively, if you qualify (earning less than $194,000), you might want to consider a Roth IRA.  I recommend working with a tax advisor to crunch the numbers.  

In any case, I encourage you to save to the max!

Spouses can collect Social Security benefits

The short answer to your next question is that 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 or once the working spouse has reached their full retirement age (FRA). 

This sounds clear enough, but there are a number of rules and exceptions to think about.

What and when a nonworking spouse can collect

The Social Security benefit of a nonworking spouse is up to 50 percent of the working spouse’s FRA benefit. (FRA is 66 for those born between 1943 and 1954.) So if your FRA benefit is $2,000 per month, your husband would be able to collect up to an additional $1,000. Once you file (or reach your FRA), your husband can:

  • Take Social Security right away. However, filing before his FRA will permanently reduce his spousal benefit. 
  • Wait until FRA in order to receive his full spousal benefit, which is 50 percent of your FRA benefit. 

Just 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 is no benefit for your husband to postpone filing beyond age 66.  Unlike the worker’s benefit, which continues to increase until age 70, a spouse’s benefits max out at FRA.

Why timing is important

Both you and your husband should give a lot of thought to when to begin collecting Social Security. If you apply now, at age 62, your benefit will be permanently reduced by 25 percent. That could make a big dent in your monthly income and would also reduce any future survivor benefits should your husband outlive you.

Therefore, even though it might be tempting to begin taking benefits as soon as possible—after all you'll then collect checks for a longer period of time—it's a good idea to look at your "break even age" before making a final decision. This is how long you need to live to give you greater lifetime benefits despite postponing your start date. Chances are, the longer you can each wait (up to FRA for him, 70 for you), the better.

Bottom line, if you wait until you reach your FRA to file, you will be capturing the maximum spousal benefit. And if you can hold off even longer—until age 70—you will receive the highest possible retirement benefit for yourself and the highest possible survivor benefit for your husband. 

As you can see, there are several things you and your husband can do to increase your retirement security, and I highly recommend that you look into them all. A little planning can go a long way.

Have a personal finance question? Email us at 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.

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