How a Spousal IRA Works and the Benefits

A spousal IRA allows a working spouse to contribute to a non-working spouse’s IRA under specific conditions

Key takeaways

• IRAs can create tax savings while providing future retirement income
• A non-working spouse might not be eligible for a regular IRA
• But the working spouse can make contributions to a spousal IRA
• This arrangement benefits the family through greater tax deductions and retirement savings

Putting money away for retirement is essential, and many workers take advantage of IRAs because of their tax benefits. 

Participants can invest money through a traditional IRA and deduct the contribution amount from their taxable income. Alternatively, you have the option of contributing a post-tax amount through a Roth IRA, which means the eventual withdrawals are tax-free. The vehicle you choose is dependent on your retirement plans and current and future tax situations, but many people use both. 

However, couples living on one income might struggle to save enough money for retirement while reaping the most tax benefits. 

One potential solution is a spousal IRA, a fund allowing the earning spouse to make tax-advantaged contributions to a stay-at-home spouse’s separate IRA. The result is more significant retirement savings and tax benefits for the couple. 

An overview of Spousal IRAs

A non-working spouse won’t have an active 401k and might not be eligible to contribute to a traditional or Roth IRA. The solution is a spousal IRA, which permits the working spouse to make regular contributions to a distinct retirement account. 

There are rules, though, as the total contributions to the spousal IRA must stay below whatever is smaller between the couple’s combined taxable income and the IRS’s $6,000 annual limit. That limit grows to $7,000 for those 50 and older. 

These regulations mean the couple can contribute a total of $12,000 (or $14,000) per year, which is double the individual $6,000 ($7,000) limit. 

Opening a spousal IRA

Opening a spousal IRA is a straightforward process because it’s essentially the same as opening a standard IRA account. All you’ll do is head to your brokerage or create an account online through your bank or investment firm. 

You’ll have to provide bank account information for funding the account and select how often you wish to contribute to the fund. The IRS has specific laws applying to spousal IRAs, but you shouldn’t run into any problems as long as you stay within its limits. 

Remember that you must file joint income tax with your spouse to be eligible for a spousal IRA. So if you haven’t been filing your tax returns together, make sure you start this practice before opening one.

How this arrangement benefits married couples

A spousal IRA is beneficial because it allows you to double the amount of money you’re putting into your IRAs without the non-earning spouse returning to work. 

This advantage could eventually become huge when this larger amount is allowed to grow over time. Like any IRA, you can buy stocks, bonds, ETFs, mutual funds, and other investment vehicles with this capital, and it could fund a large portion of retirement if invested smartly. Spousal IRAs can also make it easier to plan for retirement because each individual will have a separate retirement fund. 

The tax benefits are significant, too, because you can potentially deduct both contributions from taxable income. 

Factors to remember

Although signing up for a spousal IRA plan is relatively simple, there are some factors to consider when planning. 

First, keep in mind that your IRA contributions might not be fully deductible in all cases. For example, if the working spouse is covered by an employer-sponsored retirement plan, you’ll only receive a full deduction for contributions if this individual is making less than $105,000 annually. There’s a partial deduction available for those making under $125,000, as well. 

You must also make less than $208,000 combined to remain eligible for a Roth IRA, which allows you to avoid taxation on post-retirement withdrawals. 

Next, you can only make contributions for the year up until the annual tax deadline. Once the deadline passes, contributions apply to the following year’s limits. 

Get the tax advice you need

Gaining tax advantages through a retirement fund can make life easier now while helping you prepare for the future. And the way these options interact—and the number of retirement plans available—varies based on each individual’s employment situation.

Provident CPA & Business Advisors offers advice to individuals and business owners, helping them choose the most tax-advantaged strategies for their needs. Contact us to learn more about our services.