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Spousal IRAs

Every year that you have earned income you can contribute up to $5,500 to a tax-deferred individual retirement account (IRA). If you're 50 or older, you can add an additional $1,000 each year. What's more, you can contribute to an IRA even if you're also participating in a 401(k) or other employer-sponsored retirement savings plan.

It's probably smart to save as much as you can afford in tax-advantaged accounts like IRAs. These accounts allow your contributions to compound faster than they would if you had to withdraw earnings to pay taxes each year. Keep in mind that when you stash your cash in investments, you're taking on some risk, including losing some or part of your investment.

The potential catch in building retirement savings with an IRA is the earned income requirement. That's money you're paid for work you do. Having no earned income is typical for people who are staying home to raise their children. The same is true for people with aging parents or grandparents for whom they're providing full-time care. If you're married, your spouse has earned income, and you file a joint tax return, you may want to consider a Spousal IRA. The way it works is that your spouse contributes to an IRA established in your name (or, of course, vice-versa). This might be a way for each of you to take some time out of the workforce without having to sacrifice your long-term financial security.

Spousal IRAs

Though an IRA that's established with contributions from your working spouse is commonly referred to as a Spousal IRA, you own the account, and you open it in your name. You decide how the contributions should be invested, and, consequently, how much risk you're comfortable with in your portfolio, and you control how the assets are managed. When you eventually take withdrawals (usually after age 59 1/2 ), you make the withdrawal decisions as well. You also name the beneficiary or beneficiaries who will inherit the assets left in the IRA at your death.

Any financial institution that offers regular IRAs should offer Spousal IRAs. You just want to be sure that the bank or brokerage you choose makes it possible to select the kinds of investments for your IRA that you want to make.

Here's a snapshot of how the process works. Spouses with earned income of at least $11,000 can contribute $5,500 to their own IRA and another $5,500 to their spouse's IRA account. If either partner is 50 or older, an annual $1,000 catch-up contribution can also be made to that person's account as long as their earned income is at least that amount. In other words, any amount that's contributed to a spouse's account does not reduce what can be contributed to the earner's account or vice versa. And earners are not required to contribute to their own account to be eligible to contribute a spouse's account. If you make less than that, you can only deposit up to your combined contribution limit in total.

You will have to choose between a traditional IRA and a Roth IRA. The Roth IRA can provide eventual tax-free income if you follow the rules for taking money out. In brief, the rules are that you must be at least 59 1/2 and the account must have been open (and funded) at least five tax years when you withdraw. But, to be eligible to contribute to a Roth IRA your family's modified adjusted gross income (MAGI) must be less than the limits Congress sets for each year. In 2014, for example, your MAGI must be no more than $181,000 to make the full $5,500 contribution to one or both accounts. Eligibility phases out as your MAGI rises and is eliminated when it reaches $191,000.

If your spouse is eligible to participate in an employer-sponsored retirement savings plan, your joint MAGI also determines whether a contribution to a tax-deferred IRA is tax deductible. In 2014 those limits are $96,000, phased out at $116,000. But if there isn't an employer plan for which he or she is eligible, IRA contributions can be deducted whatever your MAGI.

All Together Now

You don't have to keep an IRA that's been funded with spousal contributions separate from IRAs that you have contributed to in the past, or any IRAs you may contribute to in the future if you earn income. You can roll over all of your traditional IRAs into a single traditional account, or all of your Roth IRAs into a single Roth IRA. One more important note about little "I" in IRA: you can't combine your IRA with another person's IRA. Not even your spouse's.