How to plan for retirement when only one spouse is working

Today, it is not uncommon for the spouse with the highest income potential to provide for the family financially, while the other spouse stays home to do housework.

Although this arrangement can work well for raising children responsibilities in the field of elderly care in the short term, this may pose a risk to long-term retirement income planning for the non-working spouse. To limit this risk, it is critical that both spouses are informed and actively involved retirement planning decisions.

Understanding spouses’ rights regarding retirement planning is an important step in ensuring financial security for the non-working spouse.

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Retirement decisions for married couples

In a traditional way pension schemea worker is generally entitled to a normal benefit, payable throughout his life and equal to a percentage of his final salary, assuming he meets certain working and retirement age requirements. For example, a plan may provide that a participant receives 50% of their final salary for life, provided they work for 30 years and retire at age 65.

However, when the participant is married, federal law generally requires that the pension be paid as a retirement benefit qualified joint and survivor annuity (QJSA), unless the non-working spouse agrees to another arrangement. A QJSA ensures that the pension is paid to the surviving spouse after the participant’s death, usually at a reduced rate.

For example, Joe, who retires at age 65 and has a final salary of $100,000, may be entitled to an annual benefit of $50,000 for his entire life. If he chooses a QJSA with a 50% survivor benefit, he could receive $45,000 annually during his lifetime, with $22,500 going to his spouse, Mary, if he predeceases. The couple can also opt for a larger survivor benefit, but this will further reduce the initial pension amount.

It is essential that both spouses understand the implications of these choices. Selecting a QJSA may mean receiving a lower benefit during their joint lifetime, but it can provide financial protection for the surviving spouse.

A spousal IRA is another valuable tool for a non-working spouse. Even without an income of his own, the non-working spouse can do this contribute to an IRAprovided the couple files a joint tax return. Over time, consistent contributions to a spouse’s IRA can grow into an important source of retirement income, ensuring financial independence.

For example, in 2024, Mary (age 45) and Mike (age 50) will file a joint federal income tax return. Mary earns $100,000 while Mike stays home to care for sick parents. Mary can contribute $7,000 to her IRA (or Roth IRA), and Mike can also contribute up to $8,000 to his IRA, thanks to spousal IRA rules. Because Mike is at least 50 years old, he is allowed to use the catch-up provision above the traditional IRA contribution limit.

If you file a joint federal income tax return, eligibility for a contribution is based on your combined modified adjusted gross income (MAGI), which allows a non-working spouse to contribute to a traditional IRA or Roth IRA even without personal income, if the combined MAGI falls within the permitted income limits. In 2024, for married couples filing jointly, you can contribute the full €7,000 if your MAGI is less than €230,000. If your MAGI is between $230,000 and $240,000, your ability to contribute or deduct is gradually reduced. If either spouse is over 50, he or she can contribute an additional $1,000 as a catch-up contribution, bringing the total to $8,000.

Qualified Domestic Relations Orders (QDROs)

While everyone hopes for a lasting marriage, it is essential for both parties to consider how retirement assets will be divided in the event of a divorce, especially for a spouse with little or no income. pension savings. Under federal law, retirement benefits generally cannot be awarded to anyone other than the participant except through a qualified domestic relations order (QDRO). This legal document allows a non-working spouse to claim a portion of the participant’s retirement benefits in the event of divorce.

For example, a QDRO could allocate a portion of a 401(k) or retirement plan to the non-working spouse. Given the complexity of dividing pension benefits in the event of divorceespecially with defined benefit plans, it is critical to consult with an experienced attorney who can prepare a QDRO that addresses important aspects such as survivor benefits and plan subsidies during or after divorce proceedings.

How to guarantee a retirement income for a non-working spouse

To ensure that your non-working spouse is financially secure in retirement, consider the following steps:

View the pension options together. As a couple, sit down and thoroughly review your retirement plan options, especially the Qualified Joint and Survivor Annuity (QJSA). Make sure both spouses understand the implications of each option and choose the one that best secures the non-working spouse’s financial future.

Setting up a spousal IRA. If you are a non-working spouse, be sure to set up and contribute to a spousal IRA (traditional or Roth, if you qualify). Even small, regular contributions can grow over time and provide an important source of retirement income, increasing your financial independence.

Create a QDRO upon divorce. If divorce is possible, make sure you work with an experienced attorney to draft a QDRO. This legal document protects your rights to your spouse’s retirement benefits and ensures that you receive your fair share.

Consult a financial advisor. Switch one fi financial advise e R who will provide personalized advice and make complex decisions such as retirement selections, spousal IRAs and retirement income strategies.

Stay informed and involved. Regularly review your family’s financial situation, retirement accounts and plans. Attend meetings with financial advisors together to ensure that both spouses are equally informed about the decisions being made. By being proactive and involved, everyone feels safe and prepared for the future.

This can be one of the most important financial decisions you make as a couple, and ensuring that both spouses are informed is essential for a comfortable and stress-free retirement.

This article was written by and represents the opinions of our contributing advisor, not the Kiplinger editorial staff. You can consult the details of advisors at SEC or with FINRA.