“Spousal IRAs” can be confusing to some people. But the idea is simple: to enable the non-working spouse in a household to also build an individual retirement account with tax benefits.
How a spousal IRA works
The idea behind an IRA is that some of the employed person’s earned income can be contributed to a tax-sheltered account to be used after retirement. Generally, individuals who are unemployed—and therefore have no earned income—cannot take advantage of this strategy. The exception is a non-working or stay-at-home spouse of an individual who IS working and earning income.
(There are some variations between traditional and Roth IRAs. For now, we’ll focus on traditional IRAs and look at specifics of a Roth IRA in a future blog post.)
So how does this work? The employed person makes contributions from his or her earnings into an account that is in the name of the non-working spouse. (It IS, after all, an individual retirement account.) While the contributor can be named as a beneficiary of the account, the money contributed to it becomes the property of the spouse.
There are certain requirements that must be met, including:
- The contributor and spouse must be married.
- They must jointly file their income tax return.
- The contributor must have earned income at least equal to the amount contributed to the IRAs (the contributor’s own, as well as the spouse’s.)
- The spouse must be under the age of 70½ for the year in which the contribution is made—for a traditional IRA. (There is no age limit regarding Roth IRA contributions.)
Contribution limits can change, along with inflation. That is a call made by the IRS so be sure you stay aware. For a traditional IRA, you may contribute 100% of your annual earnings or up to the maximum contribution allowed—whichever is lower. For the tax year 2016, the maximum contribution allowed was $5,500 for an individual under age 50. For age 50 and older, the maximum was $6,500.
Spousal IRA deduction limits
The contributions to a spousal IRA are fully deductible on your income tax. If the working partner does not participate in a 401(k) or other employer-sponsored plan, he or she also can deduct all contributions. If the wage-earner does make use of another retirement plan, however, the amount of the deduction is reduced, based on income and tax-filing status.
Advantages of a spousal IRA
Among the benefits of the spousal IRA is the immediate tax deduction on the married couple’s tax return.
In addition, for a couple in which only one person has earned income, a spousal IRA is a good way to double your tax-advantaged savings for retirement. The working partner may contribute only to a given point, as noted earlier. But when that person contributes to a spousal IRA as well, the “counter” is reset at zero. (It must be noted, however, that in the case of divorce, the contributing individual has no claim over the money in the spousal IRA.)
In general, the rules and regulations are the same for a spousal IRA as for the earned-income contributor’s own account.
- Retired minimum withdrawals start at age 70½.
- All contributions must be in cash or checks. Securities, mutual funds and stocks may not be used to fund the IRA.
- You may make incremental contributions, or a lump-sum payment into your account. It is up to you.
- And you may make contributions to the account up until April 15 of the following year. In that case, it is highly advised that you have documentation of the date of contribution (such as a receipt or proof of mailing date to your IRA Custodian or Trustee).
In conclusion, a spousal IRA can make good sense for a couple in which one partner earns little to no income, depending on your needs and circumstances. Be sure to discuss your individual situation and investing goals with your own tax, financial or legal adviser.