Spousal IRAs: What You Need To Know

By Rebecca Lake. May 7th 2016

Saving for retirement should be a priority, both for individuals and married couples. In couples where only one spouse works, saving for the golden years on just one income may require a little creativity. While the non-working spouse can’t enjoy the perks of investing in an employer-sponsored 401(k) or company pension plan, there are still retirement options available including a spousal IRA. Depending on your spouse’s income, a spousal IRA can allow you to save for retirement while also enjoying some tax advantages. Read on to find out what you need to know about spousal IRAs.

What Is A Spousal IRA?

An individual retirement account or IRA is a tax-deferred retirement savings vehicle that allows you to set aside money for future needs. Contributions to a traditional IRA may be tax-deferred while contributions to a Roth IRA are made with after-tax dollars. You can incorporate a traditional IRA, Roth IRA or both as part of your retirement planning strategy. Generally, you must earn taxable income throughout the year in order to be eligible to make contributions to a traditional or Roth IRA. (To learn more about the differences between traditional and Roth IRAs, see Differences Between Roth And Traditional IRAs.)

The term “spousal IRA” does not refer to a specific type of IRA. Instead, it refers to contributions made to a non-working spouse’s IRA even if they have little or no taxable income. A spousal IRA is designed to benefit individuals who may have left their job to care for children or an aging relative or those who earn far less than their spouse. Whether or not you can make to your spouse’s IRA typically depends on your filing status and your annual taxable income.

Who Can Contribute?

The Internal Revenue Service (IRS) establishes the guidelines on who may contribute to a spousal IRA. Generally, you must meet the following criteria to make contributions:

  • You and your spouse must be married at the end of the tax year;
  • You and your spouse must file a joint federal income tax return for the tax year;
  • You must have taxable compensation for the tax year;
  • The amount of your taxable compensation must exceed your spouse's taxable compensation;
  • Both you and your spouse must be under age 70 ½ if you’re contributing to a traditional IRA; or
  • Your modified adjusted gross income must be less than $183,000 if you’re contributing to a Roth IRA.

In addition to the rules regarding who can contribute to a spousal IRA, there are also restrictions as to how much you can contribute each year. As of 2012, the IRS allows you to contribute up to $5,000 to either a traditional or Roth IRA for the benefit of yourself or your spouse. The limit is increased to $6,000 if you or your spouse is over age 50. It’s important to note that the total amount of your combined contributions to any IRA cannot exceed the total amount of taxable compensation reported on your federal tax return. The IRS increases the IRA contribution limits periodically to adjust for inflation.

Benefits Of A Spousal IRA

There are two primary benefits to contributing to a spousal IRA. First, by maxing out IRA contributions for both yourself and your spouse, you can build your retirement savings at a faster rate. Second, you can potentially enjoy some tax advantages if you make contributions to a traditional IRA. According to IRS guidelines, you may deduct some or all of your traditional IRA contributions depending on your income and whether or not you’re covered by an employer-sponsored retirement plan.

As of 2012, married couples filing jointly could deduct the amount of their IRA contributions if the working spouse was covered by an employer’s retirement plan and their modified adjusted gross income (AGI) did not exceed $92,000.

If you’re not covered by a retirement plan through your employer and you’re the only working spouse, you can deduct the full amount of your contributions up to the contribution limit, regardless of your income. No deduction applies to contributions made to a Roth IRA.

Spousal IRA Withdrawal Rules

The IRS also sets specific guidelines as to when spousal IRA withdrawals can occur. If your spouse has a traditional IRA, he or she must be at least age 59 ½ in order to avoid a 10 percent penalty for withdrawals. Any distributions you take after age 59 ½ are not subject to a penalty but are subject to your regular tax rate. Once your spouse reaches age 70 ½, he or she is required to begin taking minimum distributions from their traditional IRA and no new contributions are allowed. (For more information on when you can take money out of your IRA without a penalty, see When You Can Withdraw Funds From An IRA Or 401(k) Without A Penalty? )

If you make contributions to your spouse’s Roth IRA, he or she is eligible to withdraw contributions at any time without incurring a tax penalty as long as the account has been open for a minimum of five years. Any withdrawals of earnings prior to age 59 ½ may be subject to regular income tax as well as a 10 percent tax penalty unless the distribution is used for a qualifying purpose. The IRS allows you to take early distributions from a Roth IRA without incurring a penalty if the money will be used for a first-time home purchase, education expenses, significant unreimbursed medical expenses or if you become disabled.

When it comes to retirement planning, it’s important to take advantage of every available opportunity to stash away cash for the future. If you’re interested in supplementing your nest egg or building a safety net for your non-working spouse, contributing to a spousal IRA can help you achieve your financial goals.

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