Planning for retirement is a crucial aspect of financial stability, and Individual Retirement Accounts (IRAs) are a powerful tool in that plan. But what if one spouse isn’t earning income or earns significantly less? That’s where a Spousal IRA comes in. This guide will explore what a Spousal IRA is, how it works, its benefits, contribution limits, and how you can use it to build a secure financial future together.
What Is a Spousal IRA?
A Spousal IRA is not a distinct type of account but rather a strategy that allows a working spouse to contribute to an IRA on behalf of a non-working or low-income spouse. Normally, IRAs require the account holder to have earned income, but this provision ensures that households with a single breadwinner can still save for both spouses’ retirement.
Key Features of a Spousal IRA:
- Contributions can be made to either a Traditional IRA or a Roth IRA.
- The contributing spouse must have enough earned income to cover both their own IRA contribution and the spousal contribution.
- Both IRAs are held in the name of the individual spouse, not jointly.
How Does a Spousal IRA Work?
To utilize a Spousal IRA, you need to meet certain conditions:
- Filing Status: You must file your taxes as married filing jointly.
- Earned Income: The working spouse must earn at least enough to cover the combined contributions to both IRAs.
- Contribution Limits: The annual contribution limits for IRAs also apply to Spousal IRAs, but the limits are doubled for two accounts.
For example, in 2024, the contribution limit for an IRA is $6,500 per year (or $7,500 if you’re 50 or older). If you’re using a Spousal IRA, you can contribute up to $6,500 to your account and $6,500 to your spouse’s account, provided your earned income is at least $13,000.
Benefits of a Spousal IRA
Spousal IRAs offer several advantages that make them an essential tool for retirement planning:
1. Equal Opportunity for Retirement Savings
Even if one spouse stays at home to manage household responsibilities or earns less, a Spousal IRA ensures both partners can build retirement savings equally.
2. Tax Advantages
- Traditional IRA: Contributions may be tax-deductible, reducing your taxable income for the year.
- Roth IRA: Contributions are made with after-tax dollars, but withdrawals in retirement are tax-free.
3. Compound Growth
By starting early and contributing consistently, the funds in a Spousal IRA can grow significantly over time, thanks to compounding interest.
4. Flexibility in Choice
You can choose between a Traditional IRA or a Roth IRA based on your current income level and future tax expectations.
5. Encourages Long-Term Financial Planning
A Spousal IRA fosters joint planning and ensures that retirement savings are a shared responsibility, even when only one spouse is earning income.
Contribution Limits and Rules
1. Annual Contribution Limits
As of 2024, the contribution limits for IRAs, including Spousal IRAs, are:
- Under 50 years old: $6,500
- 50 years and older: $7,500 (including a $1,000 catch-up contribution)
2. Income Eligibility for Roth IRA
For a Roth IRA, income limits apply. In 2024, the income phase-out for married couples filing jointly begins at $218,000 and ends at $228,000. If your income exceeds these limits, your ability to contribute directly to a Roth IRA diminishes.
3. Deadline for Contributions
You can contribute to a Spousal IRA for the previous tax year until the tax filing deadline, typically April 15 of the following year.
Traditional IRA vs. Roth IRA for Spousal IRAs
When deciding between a Traditional IRA and a Roth IRA for a Spousal IRA, consider the following:
| Feature | Traditional IRA | Roth IRA |
|---|---|---|
| Tax Treatment | Contributions may be tax-deductible; withdrawals are taxed. | Contributions are made after-tax; withdrawals are tax-free. |
| Income Limits | No income limits for contributions. | Income limits apply for eligibility. |
| Required Minimum Distributions (RMDs) | RMDs are required starting at age 73. | No RMDs during the account holder’s lifetime. |
| Withdrawal Flexibility | Early withdrawals may incur penalties and taxes. | Contributions can be withdrawn penalty-free at any time. |
How to Open a Spousal IRA
1. Choose a Financial Institution
Select a bank, brokerage, or financial institution that offers IRAs. Compare fees, investment options, and customer service before making a decision.
2. Decide Between a Traditional or Roth IRA
Evaluate your current and projected future tax situation to choose the right type of IRA.
3. Set Up the Account
The Spousal IRA must be in the name of the non-working spouse, even though contributions are made by the earning spouse.
4. Make Contributions
Ensure the contributing spouse’s income covers the combined contributions and adheres to the annual limits.
5. Invest the Funds
Once the account is funded, choose investment options such as stocks, bonds, mutual funds, or ETFs to grow your savings.
Common Misconceptions About Spousal IRAs
1. Spousal IRAs Are Joint Accounts
This is false. Each IRA is held individually in the name of the respective spouse.
2. You Need a High Income to Use a Spousal IRA
While a higher income can help maximize contributions, Spousal IRAs are accessible to most households with earned income.
3. Only Traditional IRAs Are Eligible
Both Traditional and Roth IRAs can be used as Spousal IRAs, depending on your eligibility and preferences.
Examples of How Spousal IRAs Work
Example 1: Maxing Out Contributions
Jane and Mike are married. Mike earns $80,000 per year, and Jane doesn’t work outside the home. They file taxes jointly. Mike can contribute:
- $6,500 to his own IRA.
- $6,500 to a Spousal IRA for Jane.
Example 2: Catch-Up Contributions
Sarah (age 52) and Tom (age 55) are married. Sarah earns $90,000 per year, and Tom doesn’t have earned income. They file jointly. Sarah can contribute:
- $7,500 to her own IRA (including a $1,000 catch-up).
- $7,500 to a Spousal IRA for Tom.
Tips for Maximizing Spousal IRAs
- Start Early: The sooner you start, the more time your investments have to grow.
- Contribute Regularly: Set up automatic contributions to stay consistent.
- Diversify Investments: Allocate funds across various asset classes for better risk management.
- Review Annually: Reassess your contributions and investments every year to align with financial goals.
The Importance of Spousal IRAs in Financial Planning
For couples, Spousal IRAs can bridge the retirement savings gap that often occurs when one spouse isn’t earning income. By leveraging this strategy, you can:
- Achieve retirement equality.
- Benefit from tax-advantaged growth.
- Build a secure financial foundation together.
Final Comments
A Spousal IRA is a valuable tool for couples aiming to maximize their retirement savings. Whether you’re planning for decades down the road or catching up later in life, this strategy ensures both partners have an equal opportunity to enjoy a comfortable retirement. By understanding the rules, benefits, and options, you can take full advantage of this opportunity to secure your financial future.
