A spousal IRA lets a working partner create an individual retirement account (IRA) on behalf of their non-working spouse. This helps the non-working spouse save for retirement, which is beneficial when one spouse has limited earnings or is unemployed. This is also advantageous for stay-at-home spouses who want to save up for the future.
How a spousal IRA works
According to the contribution limits set by the IRS, individuals who work are usually the ones allowed to contribute to an IRA. However, there is an exception for married couples. Spousal IRAs enable a working spouse to save up for the retirement of their non-working spouse with tax-free or tax-deferred growth, or both.
The spousal IRA, which is also known as the Kay Bailey Hutchison Spousal IRA, was named after the former U.S. senator who advocated for its creation. It is a beneficial resource for married couples to increase their wealth as the working spouse can contribute to the couple’s tax savings. With a combined annual contribution of $12,000 over 30 years and a 5 percent compound return, retirement savings can surpass $800,000.
Rules for spousal IRAs: Here’s who qualifies and what the contribution limits are
In order to be eligible for a spousal IRA, a married couple needs to file a joint tax return (known as married filing jointly). Each spouse can contribute up to the annual maximum limit (which is $6,500 in 2023 for those under 50, and $7,500 for those 50 and older). However, their total contribution cannot exceed the taxable compensation amount reported on their tax return.
To make the highest contribution allowable, a couple under 50 years old must report earnings of at least $13,000. If both partners are over 50 years old, they must report earnings of at least $15,000. If their reported earnings are lower than these amounts, the IRS will limit their contribution based on their income.
It is important to note that a spousal IRA is not a joint account, but rather each spouse has their own account. The spousal IRA can either be a traditional IRA or a Roth IRA and is subjected to the same rules and restrictions as other individual retirement plans.
- Traditional IRA – Traditional IRA allows contributors to deposit pre-tax money, which is not subjected to taxation. However, the deduction limit is applicable. The contributions can grow tax-deferred and can be withdrawn during retirement.
- Roth IRA – A Roth IRA involves making after-tax contributions (subject to income limits) which are allowed to grow tax-free. Upon retirement, the contributions can also be withdrawn tax-free.
Things to remember for spousal IRAs:
- Funding doesn’t mean ownership – Both spouses are account owners of their respective IRAs and have complete control over the investments, beneficiaries, and withdrawals for their own accounts, regardless of who made the contributions.
- Must file joint tax returns – To qualify for a spousal IRA, married couples are required to file a joint tax return.
- No age limit for contributions – As long as one spouse is earning income, you can contribute to your IRA.
- Total income threshold for Roth IRA contributions – In 2023, if your and your spouse’s combined income is $218,000 or less, you are eligible to contribute the maximum amount to a Roth IRA. However, if your income exceeds $218,000, the contribution limit will be reduced. If you and your spouse earn $228,000 or more, you will not be eligible to contribute to a Roth IRA.
Key considerations
It is important to understand the differences between traditional and Roth IRA plans as each has its advantages and disadvantages. Additionally, reviewing the limits on these plans is crucial as they may affect your ability to deduct pre-tax contributions (in the case of traditional IRA) or participate in the Roth IRA.
If you and your spouse don’t have an employer-sponsored retirement plan like a 401(k), then contributions to a traditional IRA can be tax-deductible. But if you have such a plan, the deductibility of IRA contributions may be limited or eliminated.
If you earn more than the income limits for contributing to a Roth IRA, you can still contribute by using a backdoor Roth IRA.
Similar to traditional IRAs, contributions for this year’s taxes must be made by the tax day of the next calendar year. For example, you need to make contributions to your 2023 IRA by April 15, 2024, or later if you ask for a tax return extension.
Bottom line
The spousal IRA is the only IRA where you don’t need to have earned income to make contributions. This makes it a beneficial investment strategy to provide non-working spouses with a retirement plan, regardless of the duration of their absence from the workforce.