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A spouse who steps away from paid work to care for their family can add significant value to their household, but without income, they may find it hard to invest in their retirement. Some forms of tax-advantaged retirement accounts require individuals to earn compensation, making them inaccessible for those not working. One solution is a spousal IRA.
A spousal IRA is a tax-advantaged individual retirement account that allows a spouse with no or minimal income to save for their golden years.
How a Spousal IRA Works
To contribute money to a regular IRA, you must earn taxable income, according to the IRS. However, a spousal IRA makes it possible for non-working or low-income partners to contribute for retirement with tax advantages, just like their spouse. This can double a couple's tax benefits when it comes to preparing financially for retirement.
To qualify, the spouses must be legally married and file their taxes jointly, and one of them must earn taxable compensation. Either spouse can contribute to the spousal IRA.
A spousal IRA isn't actually a different type of IRA; rather, it's an option that allows a non-working spouse to open an IRA in their own name if they meet certain criteria. Just like their partner, the spouse has a choice of whether to open a traditional IRA or a Roth IRA for their retirement account and how their money is invested. Account holders can make contributions up to a maximum amount each year, which grow over time.
Traditional IRAs place no limit to how much the account holder can earn, and you can contribute pre- or post-tax funds to it. The money grows tax-free, and you only pay income tax on it when you make withdrawals. You are required to start taking minimum distributions once you reach 72 years old.
Contributions to a Roth IRA, on the other hand, use money that's already been taxed. That means the money contributed grows tax-free, and as long as you own the account for five years and start withdrawing it after age 59½, withdrawals are tax-free. There are no mandatory or minimum distributions with a spousal Roth IRA. These accounts do have income caps, however (see below).
The type of spousal IRA account you choose should depend on the tax bracket you're in when you're contributing, and the one you'll be in when you're withdrawing. For some people, their tax rate will be less during their contribution years so it's best to pay taxes on the front end; for those who plan to have a lower income during retirement, they'll pay lower taxes if they get taxed on the back end. A tax expert can help you select the best option for your family's financial situation.
Spousal IRA Contribution Limits for 2022
Because IRAs offer significant tax advantages, the government limits how much can be contributed to them each year.
The IRS currently allows a maximum annual IRA contribution of $6,000 per spouse. In other words, each spouse can contribute $6,000 to their personal IRA each year. People ages 50 or older are allowed to contribute an additional $1,000 per year to help catch up as they near retirement.
If you're a non-working spouse with a spousal IRA, and your spouse works and has their own IRA, they can contribute $6,000 to each account for a total of $12,000 annually (or $1,000 more per person above age 50).
Spousal IRA Rules
To enjoy the benefits of a spousal IRA in your own name, you must follow certain rules from the federal government. Most important, you must be legally married and file a joint tax return with your spouse. As noted in the previous section, you also can't contribute more than $6,000 or $7,000 per year, depending on your age. On the bright side, spousal IRAs allow you to contribute at any age, as long as one spouse is earning an income.
While spousal IRAs can be either Roth or traditional, bear in mind that only those with income below a certain threshold are eligible for Roth accounts. For 2022, the IRS doesn't allow Roth contributions from those earning more than $214,000 per year.
Be aware that contributions to traditional IRAs may be tax-deductible, though this depends on whether either spouse utilizes a workplace retirement plan such as a 401(k). An accountant or financial planner can help you navigate questions around retirement accounts and taxes.
How to Open a Spousal IRA
Opening a spousal IRA is no different from opening a regular IRA. You can open your retirement account online, by phone or in person with any major brokerage firm, such as Vanguard, Charles Schwab, Fidelity or E*Trade. Robo-advisors such as Wealthfront and Betterment also offer IRA accounts that may have lower fees than traditional financial institutions. Compare your options to see how each stacks up. If you're overwhelmed, consider hiring a financial planner or investment advisor to point you in the right direction.
The Bottom Line
While a spousal IRA does require that one spouse earn an income, it allows a non-working spouse the benefit of a tax-advantaged retirement account in their own name.
There are benefits to having joint accounts, but maintaining some financial accounts in your own name can be helpful on a number of fronts. It can offer a sense of financial independence and ensure you have access to funds or credit should something happen.
Having an IRA in your own name is one way to help secure your future. It may also be smart to have a credit card in your own name, both so you can build a strong credit history and to ensure you always have access to future credit. If you only have a joint account, check out personalized credit card offers with Experian's card comparison tool.