What is a Spousal IRA?
An individual retirement account (IRA) can be funded in the name of a nonworking spouse who has no or very little income using the spousal IRA strategy. This is an exception to the rule that states one must be employed to contribute to an IRA. The total of contributions made on behalf of both spouses must, however, equal or exceed the working spouse’s income.
The earned income requirement for married couples can be met entirely by one spouse. If one spouse makes enough to cover both spouses’ contributions, that individual may contribute to their account and an account in the nonworking spouse’s name.
Spousal IRAs are similar to Roth and traditional IRAs but are intended for married couples. To contribute to a spousal IRA, couples must file joint returns. Couples filing jointly can contribute $6,000 per individual to a spousal IRA in 2022 and $6,500 per individual in 2023. If you are older of 50 years, you may make an additional $1,000 catch-up contribution.
1. How Does it Work?
There is no such thing as a “spousal” account. Spousal IRAs are just regular IRAs that are used by a married couple. Each spouse can use traditional, Roth, or both IRAs. The key point is that the working spouse must earn at least as much as the total amount contributed to the couple’s IRAs.
According to the IRS contribution limits, only working individuals can typically contribute to an IRA. However, there is an exception for married couples. Spousal IRAs allow a working spouse to save money for a nonworking spouse’s retirement with tax-free or tax-deferred growth.
Spousal IRAs are subject to the same annual contribution limits, income limits, and catch-up contribution provisions as traditional and Roth IRAs. While IRAs cannot be held jointly in the names of both spouses, spouses can share account distributions in retirement.
The IRS has detailed rules governing how IRAs must be structured and specific guidelines for implementing spousal IRA strategies. According to the IRS, the number of your total contributions cannot exceed the taxable compensation reported on your joint return. See IRS Publication 590-A for the formula. If neither spouse participated in a workplace retirement plan, all their contributions would be tax deductible.
2. Why should you choose a spousal Roth IRA?
You can double your IRA savings rate as a couple, doubling your tax benefits. Furthermore, contributing to a spousal IRA is a great way to keep your spouse on track for retirement while they’re not working, whether staying at home to care for your children, are unemployed, or simply choose not to work.
Even if you only contribute to your spouse’s IRA for a short time while they are not working, it can make a significant difference in your long-term retirement savings. Consider what would happen if your spouse stayed home for five years, then worked for another 25 years, contributing a maximum of $6,000 monthly in $500 increments until 2022. They’d have nearly $475,000 if you didn’t fund a spousal IRA, assuming 8% annual returns. However, if you had maxed out a spousal IRA during those nonworking years, their account would now be worth more than $740,000.
3. Rules you Should Know About.
- The account owner remains the same regardless of who funds the account. When contributing to spousal IRAs, regardless of where the contributions come from, each spouse remains the named account owner of their IRA. The spouse who owns the IRA has sole authority over asset allocation, beneficiaries, and withdrawals.
- Traditional IRA participants contribute pre-tax (so they aren’t taxed on it, though deductibility is limited), and their contributions grow tax-deferred until they withdraw them at retirement.
- Spousal IRA contributions have no age limit. You can contribute to your IRA regardless of age as long as at least one member of the couple is working.
- Funding does not imply ownership – Each spouse is the sole account owner of their IRA and has authority over the account’s investments, beneficiaries, and withdrawals. It makes no difference who made the contributions.
4. Why should you choose a spousal Roth IRA?
You can double your IRA savings rate as a couple, doubling your tax benefits. Furthermore, contributing to a spousal IRA is a great way to keep your spouse on track for retirement while they’re not working, whether staying at home to care for your children, are unemployed, or simply choose not to work.
Because both traditional and Roth IRA plans have advantages and disadvantages, it’s critical to understand the distinctions.
You should also look into the limits on these IRA plans because they may limit your ability to deduct pre-tax contributions (as in a traditional IRA) or participate in a Roth IRA. As a result, it’s a valuable investment strategy for gaining access to a retirement plan for nonworking spouses, whether they’re out of the workforce for a few months, years, or indefinitely.
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