While a spouse who doesn’t work outside the home may contribute massively to the emotional and financial well-being of the family, without a regular income, they may find it challenging to contribute to their retirement savings. Enter: The Spousal IRA.
An IRA or individual retirement account typically requires earned income as an investment condition. A spousal IRA, however, recognizes that one partner in a marriage may choose to take a break from work or stay home to look after the home and family but needs to save up for their future, regardless. This is especially true for couples in one-income households in a cost-of-living crisis or during periods of high inflation.
Let’s talk about the spousal IRA, how it works, the eligibility requirements for contribution, and whether it’s the right investment vehicle for you.
What Is a spousal IRA?
When discussing retirement, most personal finance experts consider an individual’s income, savings rate, and dreams for the future. While all of that is important, it’s easy to forget that there are many single-income households in the U.S. Research shows that the percentage of single-income families has increased from 29% to 34% since the start of the pandemic.
Saving for retirement can be incredibly difficult for the non-earning partner since most investment vehicles, such as 401(k)s and traditional IRAs, require the individual to earn income to make contributions. The spousal IRA is the one exception to this rule.
The spousal IRA, a tax-advantaged Individual Retirement Account, allows the non-working spouse to contribute based on the other spouse’s earnings as long as they file taxes jointly, thus allowing them to save for retirement. If both spouses have an IRA, they can each make the maximum annual contribution limit of up to $6,500 in the 2023 tax year or $7,500 if they’re 50 or older.
As with other IRAs, the spousal IRA allows for tax-free growth if you opt for the spousal Roth IRA. The Roth IRA contributions will have already been taxed, which means that when you withdraw funds in retirement, you will not have to pay additional tax. If you invest in a traditional IRA, however, you can choose whether to contribute pre- or after-tax dollars to your account, and your money will grow tax-deferred.
How a Spousal IRA Works
A spousal IRA works in the same way as a traditional IRA or Roth IRA, with the only difference being that the working spouse can contribute up to the limit of their own IRA and their spouse’s IRA, effectively doubling the family's retirement savings. Depending on your IRA type, you can get a tax break now or during your retirement years. If you’re married filing jointly, you may also be eligible for an additional tax break — the saver’s credit, available for mid- and low-income taxpayers contributing to a retirement account.
To qualify for a spousal IRA, a couple must be legally married and file their taxes jointly. Additionally, one spouse must have a taxable income through a job or self-employment. It’s also important to note that the spousal IRA is not a joint account. While the earning partner makes the spousal IRA contributions in the non-working spouse’s account, each spouse is the individual account owner for their own IRA and has full access to that money.
The money in a traditional IRA grows tax-free, though you must take required minimum distributions once you reach the age of 72, and these are taxed as current income. The money in a Roth IRA also grows tax-free, and since this money has already been taxed, withdrawals are tax-free as long as you’ve owned the account for five years and withdraw after the age of 59 1/2.
The type of IRA you choose to contribute to will come down to the working spouse’s income and tax bracket, both now and in the future. While there are no limits to how much an account holder can earn with traditional IRAs, income limits exist for contributions to a Roth IRA.
The Spousal IRA Rules
Before you invest in a spousal IRA, here are a few things you need to remember:
- Ownership: While one spouse may fund the other’s IRA, it’s important to remember that each spouse is the sole account owner of their own individual IRA. This ensures that the non-working spouse has complete control over investments, withdrawals, and beneficiaries of the IRA, regardless of who has made the contributions. They can choose the vehicles the IRA invests in, such as stocks or mutual funds.
- No age limit: No age limits exist for contributions to a spousal IRA. You can contribute to the IRA if one spouse has enough earned income to meet the eligibility requirements.
- Joint tax returns: This is an important eligibility condition for the spousal IRA. To qualify, the spouses must file a joint tax return. If you file separately, you will not qualify for a spousal IRA.
- No income limit on traditional IRAs: There is no income limit on contributions to traditional IRAs, which means that regardless of your income, you can put your money into the spousal IRA up to the specified maximum in a given year. Do note, however, that if the earning spouse has a workplace retirement plan, you may be unable to deduct this contribution from your taxable compensation.
- Income limits on Roth IRAs: While contributions to traditional IRAs are not limited, Roth IRAs have an income ceiling. The income limit for married couples is $218,000 in 2023. Higher earners may choose to consider a backdoor Roth IRA.
- Maximum contributions: Each spouse can contribute up to the annual maximum, which is $6,500 in 2023, to their IRAs, including the spousal IRA. For those over the age of 50, there is an additional $1,000 in catch-ups, so if you’re over the age of 50 in 2023, you can contribute $7,500 to your spousal IRA in addition to the $7,500 that your spouse can contribute to theirs (as long as they’re over 50 as well).
How to Open a Spousal IRA
To open a spousal IRA, you need to follow the same process as you would to open a regular IRA. You can open an account through an IRA brokerage or a robo-advisor. Compare options and fees to see which one fits you best.
To open the account, you’ll need to provide personal details, including your date of birth, Social Security number, identification documents, and employment details. Since the spousal IRA will be in the non-working spouse’s name, they will need to open their own IRA account and provide documentation to do so. They can keep that account if they have an existing IRA.
Is a Spousal IRA Right For You?
Whether a spousal IRA is right for you will depend on your financial goals and retirement plans. A spousal IRA can be an excellent idea for high-income earners with non-working spouses, especially if you can max out the IRA contribution limit for both partners. This ensures that even though one spouse isn’t working, their retirement and nest egg are cared for and provided for. A spousal IRA also allows couples to double their pre or after-tax retirement savings, which can add up substantially over the years leading up to retirement.
During high inflation or a recession, making the total contributions can be more challenging. Still, on the flip side, having saved for retirement during the early years of your career — and especially by contributing for the non-working spouse as well — you can better ensure that you have enough to cover you during more difficult economic times.
Finally, contributing to a spouse’s IRA can help create additional tax savings for the working spouse, allowing them to shelter or defer taxes. If you can afford to fund two IRAs, it could make sense for most couples to double their retirement savings and provide for the non-working spouse’s retirement through the spousal IRA.
Saving for retirement is an essential part of creating financial freedom. Consider talking with a financial advisor to see what retirement plans work best for you and your partner.
