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The Spousal IRA: Retirement Hope for At-Home Parents During the COVID-19 Crisis

The spousal IRA turns 25 soon. What does this mean for stay-at-home mothers (and fathers) during the COVID-19 pandemic?

By Marcia Mantell, RMA

It’s back-to-school and most kids are returning to the classroom. But not all. Some parents have made the decision to keep their children home for another year of hybrid - learning and home-schooling. It is an agonizing decision to make and yet another family crisis situation caused by COVID-19 and the rising new variants.

Marcia Mantell

Marcia Mantell

Moms with young children have certainly taken a beating for the last 18 months. The initial lockdowns were a shock for everyone. But those with young children – from infants and toddlers who normally go to daycare to middle schoolers – simply could not leave their children alone.

We know the result. Approximately 2.8 million women came out of the workforce at the beginning of the shutdown. Today, there are still some 1.8 million women who have not returned to work. Most are moms with young children.

Long-Term Retirement Implications

In cases where mothers stopped working, the loss of their paychecks put millions of families on a tighter-than-usual budget. Adding insult to injury, millions of women lost one, two, or now three critical retirement savings years. The moms who had to choose their children over their careers and 401(k)s are making a tremendous financial sacrifice, for both current income needs and future retirement security.

The years anyone skips making a tax-advantaged contribution cannot be made up. The math of compounding didn’t change due to COVID-19. Dollar-cost averaging doesn’t work when new dollars don’t land in a retirement account.

Not only are these “career-women-turned-stay-at-home-moms-due-to-COVID” short-shrifted in their ability to save in their own retirement accounts, but they’re also taking a sizeable hit to their future Social Security benefits. Unless they ultimately choose to make up these zero-dollar years with more years of working into their late-60s.

(Re)Introducing the Spousal IRA for At-Home Moms

This certainly paints a bleak picture. But don’t stop reading yet. There is a glimmer of hope for the mothers who are temporarily setting aside their paychecks to care for and teach their children. They do have a somewhat surprising option to save for their retirement that wasn’t around for the last generation of at-home moms.

It’s the relatively unheralded, unknown, and greatly underappreciated “spousal” IRA. And, it’s available at every financial investment company and bank where other IRAs are offered.

To understand the spousal IRA, first a bit of background. IRAs are tax-deferred investment vehicles created under ERISA – the Employee Retirement Income Security Act. The hallmark of this legislation was the introduction of the tax-deductible IRA, effective January 1, 1974.

The IRA – short for “Individual Retirement Arrangement” – initially allowed workers to save for retirement and take a tax-deduction for their contribution. But there was a catch. In order to open and fund an IRA each individual must have earned income.

However, married women who were at-home moms in 1974 weren’t considered “working.” Therefore, they were prohibited from saving for their own retirement.

That arrangement was quickly deemed “unfair.”

A working husband could sock away $1,500 while his at-home wife could save $0. That was notably unfair for married couples filing joint taxes.

Two years after ERISA passed, an amendment allowed at-home moms access to an IRA. But it was hardly equitable. Homemakers with no outside income could only save a paltry $250.00 per year in their own IRA whereas the working husband could contribute $1,500. That’s six times more in the husband’s IRA than the wife’s.

Things went from bad to worse. Another amendment in 1982 increased IRA contribution limits, but only for the worker. The new limit rose to $2,000 per year while the homemaker’s limit remained at $250.00. Now, the working husband could contribute eight times the amount his wife could save. This gross imbalance continued for 20 years:

Homemaker’s IRA contribution limits versus worker’s IRA contribution limits, since 1974

Homemaker’s IRA contribution limits versus worker’s IRA contribution limits, since 1974

Women of the Senate Rallied on Behalf of Homemakers

In 1994, five of the seven women in the U.S. Senate worked together to propose new IRA legislation to correct this 20-year injustice in the law.

Senators Kay Bailey Hutchinson (R-TX) and Barbara Mikulski (D-MD) led the rally to change IRA rules so homemakers and at-home moms (and dads who were now starting to stay home) could save the same amount in their own IRA as the working spouse.

One key argument was that couples where both spouses worked outside the home had an unfair advantage. Their combined contribution limit was $4,000 versus only $2,250 for single-earner couples. That was a 78% higher savings opportunity for dual-income couples. In addition, the long-term investment growth potential was exponentially better for dual-income couples, furthering the disparity.

The Senators also argued how other factors undermine women’s abilities to create a more secure retirement, including how women:

  • Tended to live longer than men
  • Held lower-wage jobs and lower retirement savings
  • Stayed home for all or a part of their career to raise children
  • Typically became the caregivers for aging parents and relatives

Sound familiar? These continue to be the realities women face today. Of course, they didn’t know about COVID-19 in 1994 to add to the burden women are taking on.


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It Took Decades to Gain IRA Equality

Even with reams of stats and facts in hand, it took four more years for the “Homemaker IRA” to finally pass in Congress. In all, it took two decades of debate to garner enough political appetite to remove the inequitable and unfair obstacles for women’s retirement security.

At long last, buried deep in the 176 pages of the Small Business Job Protection Act of 1996 was Section 1427, “Homemakers Eligible for Full IRA Deduction.”

This August marked the 25th anniversary of the Homemaker IRA. It remains just about the most important account every at-home mom (and at-home dad) can have for their future. However, we cannot let COVID-19 rob at-home moms of their future retirement security.

Overall, contributory IRAs are products-non-grata. Many financial advisors and institutions don’t like small accounts. Most accountants don’t like IRAs because contributions are not tax-deductible for most of their clients.

Sure, the IRA contribution limit at $6,000 seems small compared to the $58,000 total limit in a 401(k) or 403(b). But it’s a heck of a lot bigger than $0.

So, I argue IRAs are the single most important account a woman can have in her financial pocketbook. And, they are doubly important right now for the moms who have to be home due to COVID-19. Spousal IRAs allow at-home moms to keep up momentum in their retirement savings.

Whether the IRA is tax-deductible or not should have no bearing on making annual contributions into these incredibly valuable accounts. IRAs are the gateway to a woman’s financial independence and freedom. They provide a critical foundation for women’s financial literacy in the following ways:

  • Individual accounts – full and total ownership of the contributed dollars to only one person.
  • Investment control – full and total ownership, decision-making, and management of the assets with no input from anyone else.
  • Beneficiary decision control – full and sole decision-making on who will get these assets when the owner dies.
  • Withdrawal decision control – full and sole discretion if and when to take out any money for any reason (at age 72, the IRS requires the owner to begin required minimum distributions in non-Roth IRAs).
  • Rollover account established – sole owner of an established IRA that’s ready to accept any rollovers from 401(k)s and 403(b)s.
  • Roth or traditional IRA decision control – Sure, a tax-deduction is nice, but it is not necessary for opening and funding IRAs. Tax-free Roth IRAs may be better in years when household income is lower and opens more strategic options for retirement savings in future years. Non-deductible IRAs are still powerful ownership vehicles for women.
  • SEP-IRA for gig-workers and self-employed individuals – Those who have found a way to juggle kids with some type of self-employment can save in an individual SEP-IRA and take a tax deduction.

The Glimmer of Retirement Hope

COVID-19 has wreaked havoc on households with kids in every corner of the country. Moms with young children have taken the brunt of the pandemic for their financial future. Millions are losing key retirement savings years. Thanks to the 25-year-old spousal IRA, they still retain an option to save.

Keep in mind, at-home-moms don’t have to contribute the full $6,000. It’s easy to set up autopay with $50 or $100 a month. Making any contribution in one’s own IRA means financial ownership forever.

The spousal IRA gives moms a glimmer of hope for their future amidst another bleak year of the COVID-19 crisis.

About the author: Marcia Mantell, RMA®, NSSA®

Marcia Mantell is the founder and president of Mantell Retirement Consulting, Inc., a retirement business consultancy. She develops innovative programs, marketing materials, and educational workshops for the financial services industry, advisors, and their clients. She is the author of “What’s the Deal with Retirement Planning for Women?”, “What’s the Deal with Social Security for Women?” and blogs at BoomerRetirementBriefs.com.


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