What You Need to Know About Spousal IRAs

If you’re married and your spouse doesn’t work (or earns a very modest income), you can help him or her save for retirement by contributing to a spousal IRA.

What’s an IRA?

An IRA is a savings account that comes with various tax breaks and is designed specifically to help fund your retirement. You can also invest in many different types of assets within the account including stocks, bonds, ETFs, and mutual funds. While there are many types of IRAs, the two most common options are traditional IRAs and Roth IRAs.

What’s a spousal IRA?

A spousal IRA isn’t a special type of account; it’s just your typical Roth or traditional IRA that’s subject to identical contribution limits, income limits, catch-up contributions, and other rules. The sole difference lies in the fact that a spousal IRA is opened by your spouse, in his or her name, and has a few distinct eligibility requirements—which we’ll discuss next.

Spousal IRA eligibility requirements

Ordinarily, you must have earned income to contribute to an IRA. However, a spousal IRA is one exception to this IRS provision since it allows a working spouse to make contributions on behalf of a marriage partner who brings in no (or very little) income.

To qualify for spousal IRA contributions, you must file a joint tax return with your spouse and consider income limits. For starters, you can contribute to a spousal IRA provided you earn enough income to cover contributions made to both this and your IRA. In other words, the total dollar amount of your combined contributions can’t be more than the taxable compensation reported on your joint return.

For example, if you want to contribute the maximum amount allowed in each IRA, you’ll need to earn at least $13,000 to contribute $6,500 (the 2023 maximum contribution limit) to each account. You can contribute an additional $1,000 to an IRA when the account holder is over 50 years old. These contribution limits apply to both Roth and traditional IRAs.

You should also be aware that making too much money can adversely impact the amount you can contribute and your IRA tax deductions. In this scenario, the IRS treats each type of IRA a little differently.

Spousal Roth IRA income limits

With respect to income limits, couples earning more than $228,000 cannot qualify for a Roth IRA (as of 2023). Those who earn between $218,000 and $228,000 can make only partial contributions, and couples earning less than $218,000 can contribute the maximum amount allowed.

Spousal traditional IRA income limits

No matter how much money a couple earns, they can contribute to a traditional IRA—provided they make at least enough to cover IRA contributions. However, the amount they’re allowed to deduct from their taxes (as you can claim a tax deduction when funding a traditional IRA with post-tax dollars) depends on whether the working spouse is covered by a retirement plan such as a 401(k) or 403(b) at work.

If the working spouse does not have a retirement plan at work, the couple can deduct the full amount of their IRA contributions.

If the working spouse does have a retirement plan at work, the tax deduction amount depends on the couple’s modified adjusted gross income (MAGI) reported on their joint tax return.

If the reported income is $136,000 or more (in 2023), contributions are not tax-deductible. If the reported income is less than $116,000, the couple is eligible to deduct the full amount of their contributions. Any reported income falling in between these IRS thresholds restricts couples to only partial deductions.

Other details to know about spousal IRAs

There are no age restrictions with respect to opening and funding a spousal IRA, nor any rules dictating equal contribution amounts; over the course of the year, you can contribute $6,500 in one IRA and $3,000 in the spousal IRA, for example.

There are also no restrictions stating a spousal IRA must take shape as a new account; a non-working spouse can employ an account he or she previously opened for this purpose.

Although the working spouse is funding the account, the non-working spouse controls the spousal IRA since co-ownership is not allowed. As a result, this person is completely responsible for making all investment decisions—whether that’s stocks, bonds, mutual funds, or ETFs (otherwise known as asset allocation). What’s more, he or she is not obligated to name you as a beneficiary on the account or seek your consent to name someone else as a beneficiary. You can, however, share account distributions (withdrawals) in retirement.

Following a divorce or legal separation (if you don’t remarry), you can no longer deduct contributions to your spouse’s IRA and can only deduct those to your own.

Spousal IRA benefits

Spousal IRAs are sometimes a key component that helps couples sock away savings for their retirement, especially if one spouse has left the workforce to raise children or care for a family member. The biggest benefits are tax breaks.

With traditional IRAs, your contributions are typically tax-deductible and you don’t pay taxes on your earnings until you withdraw money. Roth IRAs are funded with after-tax money, and any earnings and withdrawals you make during retirement—generally after you turn 59.5 years old—are tax-free.

Combining these tax breaks with compound interest is also a good recipe for building your retirement nest egg. For example, if you contribute $500 a month into a spousal IRA and your investments yield a reasonable 5% return (per Moneychimp.com, the S&P 500 has experienced an average return of 7.51% between January 1, 2000 and December 31, 2021), you’d see a balance of over $132,000 within 15 years.

Finally, spousal IRAs are a good way to close the savings gap between men and women, as the Employee Benefits Research Institute recently revealed that women typically have much lower IRA balances (on average) than men.

Where to open a spousal IRA

You can open a spousal IRA at almost any bank, credit union, or other financial institution, and it will probably take shape as an IRA Certificate of Deposit (CD). This is sometimes a good option for people who want to minimize risk and guarantee a return.

Alternatively, you can open a spousal IRA through your financial advisor or online brokerage—enjoying the ability to choose your investments and potentially end up with higher returns, albeit with more risk.

In sum: what you need to know about spousal IRAs

Spousal IRAs are often an excellent option for couples to save for retirement, especially since enjoying your later years won’t come cheap. Considering that, according to Fidelity, an average retired couple (age 65) in 2022 may need approximately $315,000 (in after-tax money) just to cover healthcare expenses in retirement, it’s easy to see why every dollar counts.

Questions about spousal IRAs? Schedule a FREE Discovery call with one of our CFP® professionals.

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Vision Retirement is an independent registered advisor (RIA) firm headquartered in Ridgewood, New Jersey. Launched in 2006 to better help people prepare for retirement and feel more confident in their decision-making, our firm’s mission is to provide clients with clarity and guidance so they can enjoy a comfortable and stress-free retirement. To schedule a no-obligation consultation with one of our financial advisors, please click here.

Disclosures:
This document is a summary only and is not intended to provide specific advice or recommendations for any individual or business.