What Are Spousal IRAs and How Do They Work?

Highlights:

• A spousal IRA is a type of tax-advantaged retirement account that allows a working spouse to contribute to a non-working spouse’s savings.
• To qualify for a spousal IRA, you and your spouse must file your taxes jointly and adhere to normal IRA contribution limits.
• If you have a spousal IRA in your name, you own the money inside – no matter where the contributions originate.

If you’re in a single-income marriage, saving for retirement can be tough. How can a non-working spouse with no earned income still achieve their financial goals? For some couples, the answer may lie in a spousal IRA.

What is a spousal IRA?

IRAs — short for individual retirement accounts — allow you to save money for retirement on a tax-free or tax-deferred basis. IRA rules typically include an important stipulation: To qualify for and contribute to the account, the account holder must have earned income.

Spousal IRAs provide a workaround to this rule, allowing a working spouse to contribute to an IRA owned by a non-working spouse.

How do spousal IRAs work?

There are a few different types of IRAs, each with its own rules and tax requirements. However, the two most common accounts are Roth and traditional IRAs. With a traditional IRA, contributions are made with pre-tax dollars and grow tax-deferred until they are withdrawn. With a Roth IRA, contributions are made with after-tax funds and can be withdrawn tax-free during retirement.

A spousal IRA is not a unique type of IRA. Rather, it refers to any IRA that qualifies under the IRS rules permitting one spouse to contribute to another spouse’s account. To qualify for a spousal IRA, a couple simply must be married and filing taxes jointly.

Both spouses may contribute according to IRS limits, but a spousal IRA has only one legal account holder. If a spousal IRA is in your name, you own the money inside – no matter where the contributions originate.

Spousal IRA rules

Spousal IRAs are subject to IRS rules that apply to all IRAs, including contribution and income limits.

• Tax filing status. To qualify for a Roth or traditional spousal IRA, you and your spouse must file your taxes jointly. If you’re a single filer, a head of household or even married but filing separately, you’re ineligible.
• Contribution limits. First, you’ll need to make sure that the combined total of both your and your spouse’s contributions do not exceed the working spouse’s income. You must also follow normal IRA contribution limits, meaning that you and your spouse may only save up to the maximum contribution set by the IRS for each tax year.
• Income limits. Spousal Roth IRA income limits are set by the IRS and determine whether you can make full or partial annual contributions to your account. Limits for married couples filing jointly can change for each new tax year, so remember to check the IRS website to verify your eligibility.
• Federal tax deductions. If you or your spouse has a 401(k) or another employer-sponsored retirement plan, you may be unable to deduct some or all of your IRA contributions when you file your federal tax return. If you have a traditional IRA, you’ll also need to adhere to the spousal IRA income limits that determine what portion of your contributions are tax-deductible.

Is a spousal IRA the right option for you and your spouse? First, be sure that you and your spouse file your taxes jointly. Next, verify that an IRA makes sense for your long-term financial plan — if it does, determine whether you would benefit most from a traditional or a Roth IRA.

Roth spousal IRAs are only available to couples who fall under the IRS’s income limit. They’re usually recommended for those who think they’ll fall into a higher tax bracket in the future. Consider a traditional spousal IRA if you think you’ll fall into a lower tax bracket once you retire.

How to open and contribute to a spousal IRA

You can open a spousal IRA with any financial institution that offers Roth, traditional and other types of IRAs, including banks, brokerage firms and investment companies.

Once you’ve opened your account, you can contribute up to the maximum annual limit set by the IRS. You may choose to invest your money in different mutual funds, stocks and bonds. After you decide how to allocate your contributions, you can sit back, watch your wealth grow and anticipate a happy retirement for you and your spouse.