Spousal IRA: Qualifications, contributions, tax considerations

If one spouse isn’t working, how can your household save equally for retirement? 

A spousal IRA may be the answer. This type of retirement account allows working spouses to contribute to an individual retirement account on behalf of their non-earning partners. 

This guide dives into what a spousal IRA involves, who qualifies, and how to navigate contributions and tax situations wisely to build a secure retirement together.

What is a spousal IRA?

A spousal IRA challenges the conventional notion that IRA contributions should align with individual earnings. It allows a non-working spouse to contribute to a retirement account using their working spouse’s income. This strategy enables both partners to double their retirement savings on one income. 

Although contributions come from the working spouse’s income, the IRA is registered under the non-working spouse’s name, which establishes individual ownership.

Establishing a spousal IRA is straightforward and available through most financial institutions. All it requires is basic personal information from the non-working spouse.

Spousal IRA eligibility requirements

Before opening a spousal IRA, you should familiarize yourself with its rules and eligibility requirements. 

To qualify, couples must file a joint tax return (married filing jointly). In addition, the working spouse’s income must be at least equal to the total contributions made to both IRAs. 

Remember that while you’re married, each spouse owns their IRA separately; they are not joint accounts. Also, both spouses can contribute up to the current maximum IRA limit as long as they meet the earned income requirements. 

For example, the 2024 annual IRA contribution limit is $7,000 ($8,000 if over 50), so the working spouse can contribute $7,000 to their own IRA and another $7,000 to the spousal IRA as long as their earned income is at least $14,000 ($16,000 if over 50).

Deciding between traditional and Roth IRAs 

Your next decision is choosing between a traditional IRA and a Roth IRA or a combination of the two. Both options have their strengths, and the choice often depends on your current and future tax situations.

Contributions to a traditional spousal IRA are tax-deductible, reducing your annual taxable income. However, withdrawals during retirement are taxed as income. 

On the other hand, Roth IRA contributions are made with after-tax dollars, meaning there’s no immediate tax deduction. However, withdrawals during retirement—including earnings—are tax-free if certain conditions are met.

So, how do you choose? Here are some factors to consider:

• If you’re in a high tax bracket now and expect to be in a lower one during retirement, the immediate tax deduction from a Traditional IRA might be more beneficial.
• On the other hand, if you expect to be in the same or a higher tax bracket when you retire, tax-free withdrawals from a Roth IRA could be more advantageous.
• Additionally, if the non-working spouse lacks other retirement savings, a Roth IRA can provide financial security with tax-free distributions in retirement.

Contribution limits and rules

Understanding the IRA contribution limits and rules is essential to avoiding penalties and maximizing the advantages of your spousal IRA. 

For 2024, the individual spousal IRA contribution limit is $7,000, or $8,000 for those aged 50 or older. Couples with only one working spouse can contribute a combined total of up to $16,000 if both spouses are 50 or older.

Remember, you can contribute to an IRA for a particular tax year anytime between January 1 of that year and the tax filing deadline of the following year—usually April 15. You’re also free to spread out your IRA contributions throughout the year as long as they don’t exceed the annual limit. Just be sure to account for total contributions to both traditional and Roth IRAs.

Investment options

When it comes to investment choices, a spousal IRA offers a diverse range, including:

• Mutual funds
• ETFs
• Stocks
• Bonds

The key to any investment strategy is to diversify your investments and adjust your asset allocation regularly to align with retirement goals and risk tolerance. It’s best to seek the help of a professional to get a tailored investment strategy that adapts with you as your life changes.

Tax implications and advantages of spousal IRAs

One key benefit of spousal IRAs is their tax advantages. If you contribute to a traditional spousal IRA, your contributions can be tax-deductible, effectively lowering your taxable income for the year. 

However, the deduction depends on whether the working spouse has access to a workplace retirement plan like a 401(k) and 403(b). If neither spouse has a workplace retirement plan, the traditional IRA contributions for both will be fully deductible.

On the other hand, Roth spousal IRAs offer the potential for tax-free growth, assuming certain conditions are adhered to over time. However, you should be aware that income limits for contributing to a Roth IRA affect couples based on their Modified Adjusted Gross Income (MAGI), potentially restricting direct contributions to a Roth spousal IRA. 

If your combined income exceeds these limits, you might explore a backdoor Roth IRA strategy, utilizing non-deductible traditional IRA contributions converted to a Roth IRA.

Strategies for managing spousal IRA investments

Prudent management of your spousal IRA investments is key to enhancing your retirement savings. The first step is to decide on an asset allocation that reflects the risk profile and growth goals specific to the non-working spouse.

Regularly evaluating the investment performance of your spousal IRA can also help inform better asset allocation. Look at the historical performance of your investments and consider how they fit into your overall retirement plan. Remember, it’s not about chasing the highest returns but creating a balanced portfolio that aligns with your risk tolerance and retirement goals.

Impact of income changes on spousal IRA contributions

Just as your income can fluctuate, so too can your contributions to a spousal IRA. If the working spouse’s income changes, you may need to adjust your contributions accordingly. Bear in mind that the working spouse’s income must at least match the total contributions to both spouses’ IRAs.

If your income increases and you end up contributing more than allowed to your spousal IRA, don’t panic. You can take the following steps to withdraw the excess contributions and avoid a 6% tax penalty for any ineligible contributions:

1. Stay proactive and adjust your contributions during the year to remain within the allowable limits.
2. Contact your IRA custodian or financial institution to request a withdrawal of the excess contributions.
3. Make sure to complete the withdrawal by the tax filing deadline.

Following these steps will help rectify the situation and avoid penalties.

Withdrawals and RMDs

Understanding how withdrawals and Required Minimum Distributions (RMDs) work is crucial to avoiding penalties and simplifying your tax planning. 

According to the SECURE 2.0 Act, if you have a traditional spousal IRA, you’re required to start taking RMDs at age 73, with some exceptions. All RMD withdrawals from a traditional spousal IRA are included in your taxable income, except for any previously taxed contributions.

On the other hand, Roth spousal IRAs do not require RMDs during the account owner’s lifetime, providing an advantage for those who prioritize wealth transfer. However, beneficiaries of a Roth IRA, including surviving spouses, are required to take RMDs, which must be reported on their tax returns. 

Failing to take RMDs from a traditional spousal IRA as required can result in a penalty, so it’s crucial to understand these rules.

When is a spousal IRA not the best option

Even though spousal IRAs have a lot of advantages, it’s important to consider when they might not be the best option. 

For example, suppose your modified adjusted gross income is high enough to limit or eliminate the tax deductibility of contributions to a traditional spousal IRA. In that case, you might want to consider exploring other retirement savings options.

Moreover, if the employed spouse is enrolled in an employer-sponsored retirement plan, it can reduce the income thresholds for tax-deductible contributions. This may make a traditional spousal IRA less appealing. 

In the event of a divorce, the IRA belongs to the individual whose name is on the account, highlighting a potential risk in depending solely on a spousal IRA for retirement savings.

Final word

Spousal IRAs offer a powerful way for couples with a single income to maximize their retirement savings. Whether you choose a traditional or Roth spousal IRA (or both) depends on your current and future tax situations, and both options come with their own set of rules and limits. 

While setting up and managing a spousal IRA can seem complex, with the proper planning and strategies, you can take full advantage of this financial tool to secure a comfortable retirement for you and your spouse. Remember, the journey to a successful retirement starts with a single step, so why not take that step today?

Frequently Asked Questions

What are the rules for a spousal IRA?

For a spousal IRA, a couple must be married and file taxes jointly. Both spouses can contribute, but the account has only one legal holder.

Can I contribute to my wife’s IRA if she doesn’t work?

Yes, you can contribute to your wife’s IRA if she doesn’t work, as long as you have earned income and file taxes jointly with your spouse. You can contribute to a spousal IRA based on your spouse’s earned income rather than your own.

Should I open a spousal IRA?

Opening a spousal IRA can help you and your spouse double your retirement savings. It provides a way to maximize contributions and secure a comfortable retirement for both partners. It’s a smart way to ensure financial security in the future.

Can I open a Roth IRA with my spouse?

Yes, a non-working spouse can open and contribute to a traditional or Roth IRA if the working spouse is filing a joint tax return. Both spouses must file a joint tax return to qualify for a spousal IRA.

When might a spousal IRA not be the best option?

A spousal IRA might not be the best option if your modified adjusted gross income limits the tax deductibility of contributions or if an employer-sponsored retirement plan covers the working spouse. Be mindful of these factors when considering a spousal IRA.