How to Save for Retirement Without a Paycheck

Planning for retirement is crucial, whether you’re in the workforce or have stepped away to focus on other priorities, such as raising a family or caring for an elderly parent. Even if you’re not currently working, you can still take advantage of tax-favored retirement accounts. At our CPA firm, we’re committed to helping you navigate these options and understand how you can maximize your retirement savings. One excellent way to do this is through a spousal IRA. Here’s what you need to know about utilizing these accounts effectively.

Nonworking Spouse: Contributing to Your Own Traditional IRA

A Traditional IRA is a popular choice for retirement savings, allowing contributions to grow tax-deferred until withdrawal. As of the 2024 tax year, a nonworking spouse can make a deductible to a traditional IRA, even if they aren’t currently earning income. The contribution limit is up to $7,000 annually, or $8,000 if you will be 50 or older by December 31, 2024.

However, there are two main qualifications to consider:

Joint Tax Filing: You and your spouse must file a joint tax return.
Earned Income: Your working spouse must have earned income that equals or exceeds the total contributions you both make to your IRAs.

Deductibility Limits: If your spouse is covered by a tax-favored retirement plan through a job or self-employment, your ability to make a deductible contribution phases out between a joint adjusted gross income (AGI) of $218,000 and $230,000 for 2024.

If the working spouse isn’t covered by such a plan, the nonworking spouse can make a deductible traditional IRA contribution without any AGI limitations. This flexibility makes traditional IRAs an excellent option for many couples.

Understanding Adjusted Gross Income (AGI):

Your joint AGI is the sum of all taxable income items and gains, reduced by above-the-line deductions such as:

Up to $300 of unreimbursed expenses for K-12 educators in 2024,
Contributions to a health savings account (HSA),
Moving expenses for members of the Armed Forces,
The deductible part of any self-employment tax bill,
Contributions to self-employed SEP, SIMPLE, and qualified retirement plans,
Health insurance premiums for self-employed people,
Alimony payments required by pre-2019 divorce agreements, and
Up to $2,500 of student loan interest.
Working Spouse: Contributing to a Traditional IRA

These deductions play a crucial role in determining your AGI, affecting your IRA contribution limits.

Working Spouse: Contributing to a Traditional IRA

If your working spouse participates in a tax-favored retirement plan, their ability to make a deductible traditional IRA contribution for 2024 is phased out between a joint AGI of $123,000 and $143,000.

If neither spouse participates in such a plan, you can each make a deductible up to $7,000 to a traditional IRA for the 2024 tax year, with the limit increasing to $8,000 if you are 50 or older. The combined earned income from your working spouse must at least equal the total contributions.

Example Scenarios:

Stay-at-Home Parent: Let’s say you’ve left the workforce to be a stay-at-home parent. You and your spouse have a joint AGI of $200,000, with your spouse covered by a qualified retirement plan at work. Here’s what you can do:
- As a nonworking spouse, you can make a deductible traditional IRA contribution of up to $7,000 (or $8,000 if you are 50 or older by year-end).
- Your spouse cannot make a deductible traditional IRA contribution due to your joint AGI exceeding the phase-out range. However, they can make a nondeductible contribution.
Recent Layoff: Imagine being laid off in January, with a joint AGI of $400,000 mainly from your spouse’s self-employment income. Neither of you participates in a retirement plan:
- Both spouses can make a deductible traditional IRA contribution of up to $7,000 (or $8,000 if 50 or older).

These scenarios highlight how different financial situations can impact your IRA contributions. Partnering with a knowledgeable CPA firm can help you navigate these complexities and make informed decisions.

Roth IRA Contributions

Roth IRAs offer another fantastic option for retirement savings, allowing after-tax contributions with tax-free withdrawals in retirement. Unlike traditional IRAs, Roth IRAs do not allow for immediate tax deductions. Instead, the benefit comes when withdrawing funds.

Contribution Limits and Eligibility: For 2024, Roth IRA contribution eligibility phases out between a joint AGI of $230,000 and $240,000 for married couples filing jointly.

You need enough earned income to match your total Roth contributions.
Participation in a retirement plan doesn’t impact Roth IRA contributions.

Annual Contribution Limits: The maximum contribution is $7,000 (or $8,000 if 50 or older). This limit applies collectively to both traditional and Roth IRAs, so contributing the maximum to one type means you cannot contribute to the other in the same year.

Example Strategy:

If your AGI is too high for a deductible traditional IRA contribution but allows for a Roth IRA contribution, choosing a Roth IRA can be advantageous. Why? Qualified Roth IRA distributions (after age 59½ and five years of holding the account) are entirely tax-free, offering significant savings compared to the fully taxable withdrawals from traditional IRAs.

Balancing Roth and Traditional IRA Contributions

One of the most strategic moves when planning your retirement is determining how to allocate your contributions between traditional and Roth IRAs. Here’s a quick guide to understanding the pros and cons:

Traditional IRA: Offers immediate tax benefits if contributions are deductible, reducing taxable income in the year of contribution. However, withdrawals during retirement are taxed as ordinary income.
Roth IRA: Provides no immediate tax deduction, but qualified withdrawals during retirement are tax-free. This can be highly beneficial if you expect to be in a higher tax bracket in retirement or want to avoid the Required Minimum Distributions (RMDs) that traditional IRAs mandate at age 72.

Consulting with Experts: The intricacies of tax planning and retirement savings underscore the importance of consulting with a reputable CPA firm. A qualified CPA can help you understand your options and design a retirement strategy that aligns with your financial goals and lifestyle.

Determining What’s Right for You

At our CPA firm, we recognize that every individual’s situation is unique. When deciding between a traditional or Roth IRA, consider the following:

Current vs. Future Tax Bracket: If you expect to be in a higher tax bracket in retirement, a Roth IRA might be more beneficial.
Need for Immediate Tax Deduction: A traditional IRA offers a tax deduction now, which may be helpful if you need to lower your taxable income.
Flexibility: Roth IRAs provide more flexibility with tax-free withdrawals, making them attractive for those who want more control over their retirement income.

Key Considerations for Nonworking Spouses

Maximize Spousal Contributions: Utilize the opportunity for spousal IRA contributions to build retirement savings even if you’re not working.
Monitor AGI Levels: Keep track of your AGI and understand how it affects contribution limits and deductibility.
Long-term Planning: Consider how current contributions align with long-term retirement goals and tax planning strategies.

The Role of a CPA Firm in Retirement Planning

Working with a CPA firm provides invaluable guidance in navigating the complex landscape of retirement savings. Our experienced professionals offer personalized advice tailored to your financial situation, helping you make the most of your IRA contributions.

From understanding AGI impacts to selecting the best IRA type, a CPA firm like ours ensures you make informed decisions that align with your goals. We’ll help you stay updated on changing tax laws, contribution limits, and strategies to maximize your retirement savings.

By collaborating with a CPA firm, you gain access to insights and personalized support, empowering you to build a secure financial future.

Get Started Today!

Are you ready to take control of your retirement savings? Contact our CPA firm to explore your options and develop a comprehensive retirement strategy tailored to your needs. We’re here to guide you through every step of the process, ensuring you make informed choices for a financially secure future.