Spousal IRA: Your quick and smart guide

For married couples, planning and saving for retirement is a conversation that is never too early to have. You and your spouse may have heard about Spousal IRAs, but what are they actually?

Read on to find out what a Spousal IRA is and how and when it can be part of your retirement savings plan.

Before jumping in, let’s start with the basics. An IRA is short form for an Individual Retirement Account. Individual Retirement Accounts are investment vehicles, approved by the IRS, to help individuals and employees save for retirement.

There are 4 different types of IRAs:

• Traditional IRAs
• Roth IRAs
• SEP
• SIMPLE

The top two are for individuals and couples saving for retirement, while the bottom two are more for small businesses, the self-employed and employees.

The inherent foundation of an IRA is to help people get tax breaks on their retirement savings.

So with a Traditional IRA you can write off your IRA contribution in the present, and then pay less in taxes in retirement. While with a Roth IRA, you pay taxes on your contribution now but they are tax-free in retirement.

IRA contributions are taken from income received from a salary or working income by an individual or spouse. So how do you get an IRA and save for retirement if you are a spouse without working income? Let’s find out.

What is a Spousal IRA?

Spousal IRAs were set up to help non-working spouses have savings in their retirement too. Whether they are non-working due to unemployment, to raise a family, studying, or unable to work, the working spouse can help support their spouse’s retirement savings.

Usually with IRAs, you are required to have earned income to open an account. With a Spousal IRA, a non-working spouse can still open an IRA account through their working spouse. The working spouse can make contributions from their income to an IRA opened and owned by their non-working spouse. The contributions may then be deducted from that year’s taxable income.

When the couple retires, a Spousal IRA allows both spouses to enjoy the tax benefits from their retirement savings. Having a Spousal IRA also provides an additional source of income and financial cushion for a non-working spouse in the unfortunate event that a spouse passes away.

What are the Spousal IRA Rules?

There are a number of fixed rules to follow for Spousal IRAs.

1️⃣First you must be legally married and filing your taxes through a joint tax return to qualify.

2️⃣Second, the income earned by the working spouse must be from employment or earned income through work. As of 2019, alimony is no longer considered earned income and would not qualify to use towards IRA contributions.

The amount you and your spouse contribute have to match IRS regulations on contributions. For 2020, the yearly maximum contribution to an IRA is:

• $6,000 per individual, if they are below 50 years old
• $7,000 per individual, if they are above 50 years old

For instance, if you are in your 40s and your non-working spouse is too, the maximum you can contribute to your IRA and the spousal IRA is a total of $12,000 combined.

If you turn 50 before your spouse does, you can contribute an extra $1,000 to your IRA, for a total of $7,000 as an individual, but only $6,000 for your spouse. And when your spouse turns 50, that additional $1,000 is applicable for their contribution as well.

Similarly, if you turn 70½ and have to start taking Required Minimum Distributions from your IRA, but your spouse has not reached that age yet, you can continue to contribute to the non-working spouse’s Spousal IRA.

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How do you open a Spousal IRA?

Spousal IRAs are essentially the same as a Traditional or Roth IRA, but funded for a non-working spouse. In all other aspects besides funding, they operate primarily the same.

When you want to open a Spousal IRA, you can open one at a financial institution, bank, mutual fund, investment company or broker. Just as you would a normal IRA.

If you have existing IRAs, check to see if your provider can help you open a Spousal IRA as well.

The working spouse will need to help open the account and provide income and employment details to the bank or financial institution. Depending on the institution, you may be able to open a Spousal IRA online and fund it electronically.

Keep in mind that if you want to open a Roth IRA, you will need to ensure that your joint income falls within the parameters set by the Roth IRA guidelines. If your income exceeds the Roth IRA income limits, opening a Backdoor Roth IRA can be an option but it can also lead to a taxable event now.

And similar to any other IRA, you can choose the investments you would like to make with the funds in the account. Whether it's investments in mutual funds, CDs, stocks or other investment vehicles that are in line with the income you need in retirement and risk tolerance.

It is always advisable to speak to a tax or retirement planning professional for you and your family’s specific situation and advice. They can help you make educated decisions on retirement planning, tax benefits, cash flow, exposure to the market and beneficiary planning for your assets.

Spousal IRA Contribution Limits

While the IRS has yearly contribution limits that can not be exceeded, there is an additional limit on how much you can contribute to a Spousal IRA.

One thing to ensure is that your total taxable income on your joint tax return must be more than your combined contributions to your IRAs.

Also if neither spouse has an existing retirement plan with an employer, then the entire contribution to IRAs can be tax deductible. If one of you has an existing retirement plan at work, you may only be able to deduct part of your contributions. Speak to your tax advisor to understand how much you can deduct from your taxable income.

And as per usual IRS guidelines, all contributions to the IRAs must be made before the tax filing deadline for that year. Once the deadline has passed, the year’s contribution limits are then reset.

Spousal IRA Distributions

Spousal IRA distributions work exactly like a Traditional or Roth IRA distribution.

With a Traditional IRA, you are required to take RMDs at age 70½ , which you will be taxed at your prevailing tax rate.

A Roth IRA does not require RMDs and can continue into retirement. When you are ready to take income, the distribution will not be taxed as the taxes were paid on the money when it was being contributed.

A major benefit of a Spousal IRA, is that it allows a non-working spouse to have exposure to investments and the market. This can allow for the non-working spouse to have equivalence and a healthy nest egg in retirement.