Latest / The Financial Freedom Podcast with Fexingo: Quitting Your Job, Living Off Investments, Independence / How Early Retirees Use a Roth IRA Without Earned Income
Transcript
- Lucas: So Luna, here's a question we get all the time: if I quit my job at forty-five and my spouse keeps working, can I still put money into a Roth IRA? Most people assume the answer is no, because you need earned income to contribute. But that's actually not the whole story. Luna: Right, because there's the spousal IRA loophole. But how many people actually know that works? Lucas: Very few. And it's one of the most underused retirement strategies I can think of. The IRS says you can contribute to an IRA based on your spouse's earned income, as long as you file a joint return. So if your husband or wife is still working and earning enough to cover both contributions, you can fund a Roth IRA even if you haven't had a paycheck in years. Luna: So that's a easy win for couples where one partner retires early and the other keeps working for a few more years. You get years of tax-free growth that you might have thought you were locked out of. Lucas: Exactly. And the contribution limit for 2026 is seven thousand dollars, plus a thousand-dollar catch-up if you're fifty or older. So a couple where both are over fifty could put up to sixteen thousand dollars into Roth IRAs in a single year, even if only one of them has a job. Luna: That's not nothing. And if you do that for, say, ten years, you're looking at over a hundred and sixty thousand dollars of contributions that can grow tax-free for decades. Lucas: Right. And the growth on that is the real story. If you assume a seven percent real return, that hundred and sixty thousand could be worth close to four hundred thousand in today's dollars after twenty years. All tax-free. Luna: And because it's a Roth, you don't have to worry about required minimum distributions either. That money can just sit there and grow as long as you want. Lucas: Right, no RMDs on Roth IRAs. That's a huge advantage for early retirees who want to keep their taxable income low in retirement and manage their tax bracket for ACA subsidies or other income-based programs. Luna: So walk us through the mechanics. How does a couple actually set this up? Lucas: It's simple. Both spouses need their own IRA accounts, and the working spouse just writes two checks each year, one to each account. The only requirement is that the working spouse's earned income is at least as much as the total contributions to both accounts. Luna: So if the working spouse earns eighty thousand dollars, they can cover the full fourteen thousand for both. No problem. Lucas: Exactly. And the non-working spouse doesn't need to have any earned income at all. The IRS just cares about the combined earned income on the joint return. Luna: But what if the working spouse earns too much to contribute to a Roth directly? That's where the backdoor Roth comes in, right? Lucas: Yes. If your combined modified adjusted gross income is above the phase-out range, which in 2026 starts at two hundred and thirty-six thousand dollars for married filing jointly, you can't contribute to a Roth directly. But you can do a backdoor Roth: contribute to a traditional IRA, then convert that to a Roth. Luna: And that works even if one spouse is retired? Because there's no income limit on conversions. Lucas: Right. Conversions have no income limit. So a retired spouse can do a backdoor Roth based on their working spouse's earned income, just as easily as the working spouse can. Luna: So the strategy is the same. You just need to be careful about the pro-rata rule if you have other traditional IRAs with pre-tax money. Lucas: That's a real consideration. If the retired spouse has a large traditional IRA from their old 401k rollover, a backdoor Roth conversion can trigger taxes on a portion of it. So you want to make sure you're not getting hit with an unexpected tax bill. Luna: Yeah, that's a mistake I've seen people make. They do a backdoor Roth without thinking about their existing traditional IRAs, and then they end up owing taxes on way more than they expected. Lucas: So the workaround is to see if you can roll your traditional IRA into your current employer's 401k, if the plan allows it. That way you have zero pre-tax IRA balance at year-end, and the backdoor is clean. Luna: Good point. And for the non-working spouse, they might not have that option if they're retired. But if they don't have any traditional IRAs, they're fine. Lucas: Exactly. So the takeaway is: don't assume you're out of the Roth game just because you're not earning a paycheck. You could be missing out on years of tax-free compounding. Luna: And that's the kind of thing that can make a real difference in your retirement income later. A few thousand dollars a year, if you start early, can really add up. Lucas: Absolutely. And on that note, we do this show without any ads, and that's a choice we've made because we want these conversations to be as straightforward and useful as possible. If you find value in what we're doing here, you can support us at buy me a coffee dot com slash fexingo. It's a small way to keep this thing going and ad-free. Luna: Yeah, and we appreciate every single one of you who's ever thought about it. It really does help us keep doing this. Lucas: So back to the strategy. Another thing to consider is the five-year rule on Roth conversions. If you do a backdoor Roth, you have to wait five years from the conversion to withdraw the converted amount penalty-free if you're under fifty-nine and a half. Luna: That's important for early retirees, because they might need that money before they hit the magic age. But the contributions you make directly, you can always pull out your contributions tax-free and penalty-free, right? Lucas: Correct. Direct Roth contributions can be withdrawn anytime without tax or penalty. The five-year clock applies to conversions and to earnings on contributions, which have tougher rules. Luna: So if you're retiring at forty-five, you might want to have a separate taxable account to bridge the gap until you can touch the Roth earnings. Or you can use a Roth conversion ladder. Lucas: And we've covered the conversion ladder in previous episodes, so we won't rehash it. But the point here is that the spousal Roth is a way to add to your tax-free bucket while you're still transitioning into retirement. Luna: And it's not just for early retirees. Even if you're not retiring early, if you have a stay-at-home spouse, you can be building up their Roth IRA every year. It's a smart move for any couple. Lucas: Exactly. So if you're in a situation where one spouse is still working, make sure you're taking advantage of this. It's one of the most straightforward tax-advantaged moves you can make. Luna: And for those who are already retired, both spouses, and you have no earned income, then you can't contribute to a Roth at all. But you can still do conversions from a traditional IRA, just with the tax implications. Lucas: Right. And that's a whole other strategy. But the spousal Roth is specifically for when one of you is still earning. Luna: So to sum it up: if you're married and one of you is working, both of you can fund a Roth IRA. Use the backdoor if you're above the income limits, and watch out for the pro-rata rule. It's a powerful move that a lot of people miss. Lucas: And if you're in doubt, talk to a tax professional. But the rules are clear, and the payoff can be huge over a couple of decades. Luna: Alright, that's a good place to leave it. For now, this is Luna and Lucas. Thanks for listening, and we'll catch you next time.