Should a Stay at Home Parent Open a Roth IRA?

Transcript

Let’s move on to Josue’s question. He says, “Should I open a Roth IRA for a stay-at-home parent, and how does that work?”

Yeah, the reason we love Roth IRAs is because that money is tax-free. It is so beautiful. You put money in there, it grows tax-deferred. So long as you meet certain qualifications, like the account has been open for five years and you’re over 59 and a half, you get to pull that money out tax-free. You build a million dollars in a Roth IRA, you are truly a millionaire. That’s nice. You build a million dollars in a pre-tax account, you’re kind of a millionaire, you know, less of taxes, right? So, it’s a really, really exciting account.

It’s so good, though, the government says not everybody can do this. Once you make over a certain income, if you’re a single person, if you make over this much, if you’re a married person filing jointly, make over this much, you can’t do Roth IRAs anymore. So, it’s fairly limited. That’s how you know the government knows that it’s good because they don’t want to let you put too much money into it.

One of the requirements to have a Roth IRA is you have to have earned income. You have to have a W-2 or a 1099. You have to be out there working, earning income, so that you can contribute to Roth. Here lies Josue’s question, right? So, if you have a stay-at-home parent, are they just out of luck? Yeah, my spouse doesn’t have any earned income. What am I to do?

Here’s what’s great: you can actually do what’s called a spousal IRA contribution so long as the household income you’re showing is large enough for both spouses to contribute. So, this year it’s $6,500. $6,500 times 2 is $13,000. So long as you have at least thirteen thousand dollars, as either spouse has thirteen thousand dollars of earned income, the working spouse can max out their Roth IRA, and then the stay-at-home spouse can also max out their Roth IRA. It is a fantastic planning opportunity to allow you to get additional tax savings in place.

Now, even if you’re someone who’s over the income limit, you can do the same thing if you’re someone perpetrating the backdoor Roth IRA strategy. I do a non-deductible traditional IRA contribution, and then I want to convert… Brian’s calling me right now. Does he not know? That’s the best thing to come in all day.

If you’re doing the backdoor Roth contribution strategy, you can do a non-deductible traditional IRA contribution, and then you can convert that to Roth tax-free. Well, you can even do that for your spouse if your spouse is not working. I don’t want to blanket say, “Josue, yes, absolutely fund a Roth for your spouse,” because what I want you to do first is I want you to follow the Financial Order of Operations. If you are following it and you’ve covered your deductibles, you’re getting your employer match, you don’t have high-interest debt, your emergency fund is built, and you are now on step five and you’re putting money into your Roth, yes, absolutely, by all means, I think putting money into a Roth for a stay-at-home spouse is an amazing idea, an amazing strategy, and a great way for a household to save more tax-free dollars. Great answer and great question. Thanks so much for that one.