The new, improved Individual Retirement Account includes a spousal IRA, designed to give a little help to housewives. But it's much misunderstood. Not even the published literature on IRAs tells much about the spousal account. Yet as a planning device, it can be of great help to women with few assets of their own. Some answers to your questions about spousal IRAs:
* Who can start a spousal IRA?
It can be started only by a working person, generally the husband, whose spouse does not work outside the home. In short, it is for housewives without earnings. (Wives who have jobs and earnings can start their own Individual Retirement Accounts: They don't need a spousal IRA.)
* How do you start a spousal IRA?
Banks, savings and loan associations and mutual funds are the most popular places for IRA deposits. Just go to the bank or S&L, or write to the mutual fund, and ask for information. As Dennis Nelson of the Fidelity Funds group explains it, the working spouse normally opens his own IRA, than adds a second IRA for the nonworking spouse. "In our view, these are two separate accounts, and each one belongs to the spouse whose name is on it," he told my associate Virginia Wilson.
* How much can you put into a spousal IRA?
An individual alone can contribute up to $2,000 a year to his own account. If he starts a spousal IRA, his maximum contribution rises to $2,250 (although he could also deposit less). Each annual contribution can be split between the two IRAs in almost any way. As much as $2,000 can go into one account, and as little as $250 into the other.
Some husbands may decide to keep the lion's share for their own account. Some couples may split each year's contribution 50-50. Some might decide to put the lion's share in the wife's account every year, in order to build up her personal assets.
What happens if the wife gets a job?
In that case, the husband may no longer contribute to her IRA account. Instead, she makes the contributions, out of her own earnings. If she works part-time and earns less than $2,000, she may deposit the equivalent of her entire earnings for the year. If she earns more, she may deposit up to $2,000. If she later quits her job, her husband may resume making annual contributions to her IRA account. (But he can make those contributions only in a year when her earnings are zero.)
* Must the wife name the husband as beneficiary of her spousal IRA?
No, she can name anyone she wants. And, the husband can name anyone he wants as beneficiary of his IRA.
* Can the wife move her spousal IRA out of the bank or mutual fund where it was started?
Yes. IRA funds may be moved as often as you like in a tax-free exchange, as long as the check is made out to the trustee of the new IRA plan. Assume, for example, that you both have your IRAs in an S&L 18-month certificate. When the certificate expires, the wife might decide to move her money into a mutual fund, while the husband rolls his account over into another S&L certificate.
Each year's new contribution may be divided between your two IRAs, wherever they are. Or, each of you could start another IRA in a new place. The wife, for example, might leave her first-year's funds in the S&L and start a mutual-fund IRA in the second year.
When starting a spousal IRA, the wife may invest her share of the funds entirely separate from her husband's share as long as she meets the minimum investment required by the institution. The Fidelity will accept a spousal IRA containing as little as $250.
* What if there's a divorce?
What happens to the funds in the IRA depends on state law. In a few states, property belongs solely to the person whose name is on it. So the wife's IRA would be hers, and the husband's his. But most states now have either community-property or equitable-distribution laws, which require a divorcing couple to divide their property between them.
The divorcing parties, through negotiation, may decide how to split the funds. Or a judge may decide it for them. If the husband has $30,000 in an IRA and his wife has only $5,000, for example, and that's the bulk of their marital property, the judge might decide that the wife should get $10,000 of her husband's IRA money or its equivalent.
Normally, a person under age 59 1/2 would owe a tax penalty if he withdrew money from an IRA and gave it to his spouse. But you can transfer part or all of the funds from one spouse's IRA to another without penalty, says the IRS, as long as it's done pursuant to a court decree or a written divorce agreement.