What is a spousal IRA and what are the rules?
Did you know that you can set aside thousands of dollars toward retirement each year through a spouse IRA even if your spouse isn’t working?
A “spouse IRA” is a fancy label, but if you’re familiar with Individual Retirement Accounts, you’ll likely find the concept familiar.
In this article, I’ll explain what a spousal IRA is, the rules that apply to spousal IRAs (and IRAs in general), and where you should consider opening a spousal IRA.
What is a spousal IRA?
A spousal IRA allows a working wife or husband to contribute to a tax-advantaged retirement account registered in the name of a non-working (or low-income) spouse.
Spousal IRAs allow you to set aside up to $12,000 per year in IRAs as a married couple, even if one of you isn’t working. (That number adds up to $14,000 in total, or $7,000 each, for people age 50 and older.)
Joint IRAs do not exist. The name “Individual Retirement Account” is quite literal. Thus, the working spouse must contribute to the IRA which is in the name of the non-working spouse.
The term “joint IRA” is not the name of a product. It simply describes the legal act of contributing to your spouse’s normal IRA in their place. The non-working spouse can open an IRA before getting married, before becoming unemployed, or after becoming unemployed.
Even though Spouse A is the one funding the registered IRA for Spouse B, technically Spouse B has full control of the account. This means investing the funds, naming a beneficiary and deciding whether to sell or withdraw.
What are the spousal IRA rules and requirements?
Want to invest with a Spouse IRA? There is one major rule. You must be married and you must file your taxes jointly. Otherwise? No dice.
Apart from this distinction, the rules that apply to your “regular” IRA also apply to a spousal IRA. Here are some of those rules and requirements:
- Your combined MAGI (modified adjusted gross income) must be equal to or greater than the amount of money you contribute to an IRA. In other words, if you earn a total of $10,000 per year, you cannot contribute more than $10,000 in total to your two IRAs.
- Required minimum distributions (RMDs) and income limits for tax-deductible contributions still apply to traditional IRAs.
- Income limits for contributions still apply to Roth IRAs. I will detail the income-based rules for all IRAs shortly.
- If you haven’t contributed the maximum to your husband’s or wife’s account in a given year, you have until mid-April of the following year to continue contributing, just as you do with your own IRA.
- If you are married and file your taxes jointly with an adjusted gross income of less than $68,000 in 2022, you will be eligible for a savings tax credit of up to $2,000.
Roth Income Limits and Traditional IRAs
Clark thinks a Roth IRA is the best choice for most people. But if you make too much money, you won’t be able to contribute to a Roth in 2022.
Here is the eligibility table for married taxpayers filing jointly.
|Combined taxable income||Contribution limit|
|Less than $204,000||$6,000 for each spouse ($7,000 for those 50 and over)|
|$204,000 – $214,000||Waived contributions (limit changes based on income)|
Contributions to a traditional 401(k) or IRA are generally tax deductible.
However, sometimes traditional IRA contributions are not tax deductible. Let’s say you’re married and filing jointly and the spouse contributing to the IRA has access to a retirement plan at work. The IRS gives you fairly conservative income limits before it stops you from lowering your tax bill further via IRA contributions:
|Combined income||Tax deductible?||Contribution limits|
|Less than $109,000||Contributions are fully deductible||$6,000 per person ($7,000 for 50+)|
|$109,000 to $129,000||Partially deductible (removed based on specific income)||$6,000 per person ($7,000 for 50+)|
|$129,001 or more||Not tax deductible||$6,000 per person ($7,000 for 50+)|
Now suppose that the person who contributes to the spousal IRA does not have access to a retirement plan at work, but his spouse does. In this case, the IRS sets the income limit a little higher before removing the tax-deductible contributions:
|Combined income||Tax deductible?||Contribution limits|
|Up to $204,000||Contributions are fully deductible||$6,000 per person ($7,000 for 50+)|
|$204,000 – $214,000||Partially deductible (removed based on specific income)||$6,000 per person ($7,000 for 50+)|
|$214,001 or more||Not tax deductible||$6,000 per person ($7,000 for 50+)|
How Much Money Can a Spouse IRA Save Me for Retirement?
Think about how much money you spend each year right now. This figure is likely to increase in the future due to inflation, rising medical costs, taxes and other factors.
Contributing an extra $6,000 to the IRA of a non-working spouse each year, if you’re able, doesn’t seem like much in this context. But contributing $500 every month for 30 years comes out to almost $420,000 at a conservative rate of return of 5%.
After maximizing your own IRA, you may only have enough money to contribute $100 per month. But let’s say you do this every month from the time you turn 25 until the time you turn 65. You’ll still set aside over $150,000 with that same 5% ROI.
Setting aside some extra money for retirement through a spousal IRA can create a significant amount of money for you and your marriage at the end of your working days.
Where and How to Open a Spousal IRA
A joint IRA is a bit of a misnomer. It is not a separate product. It is just a normal individual retirement account that you are allowed to fund if it is in your spouse’s name and you file your taxes jointly.
You can manage your own investment portfolio within your Roth IRA or use a robo-advisor. Clark’s favorite reason for managing his own portfolio is to avoid fees.
To that end, Charles Schwab, Fidelity, and Vanguard are his three favorites for nearly every investment. anguard are his three favorites for almost every investment.
Consider how you will invest the money in your IRA before opening a new account. This way you can compare the companies you are considering more critically.
Let’s look at Clark’s most common retirement investment recommendation, the target date fund, at all three institutions.
|Vendor||Target Date Fund Minimum Investment||Typical expense ratio||Begin|
|Avant-garde||$1,000||0.12% to 0.15%||Click here|
|loyalty||$0||0.12% to 0.75%||Click here|
Recently, Clark says he sees Vanguard’s customer service trending in the wrong direction, though he still recommends the institution.
A robo-advisor is a good option if you prefer to outsource your investment. Some of the best robo-advisors charge 0.25% or less per year in management fees.
Roth vs. Traditional IRAs: Clark’s Take
Clark often takes pleasure in calling himself “Roth’s man”.
“I’m obsessed with the Roth as a way to save for retirement,” Clark says.
Because Roth contributions involve after-tax dollars, you can withdraw your contributions—and your earnings on those contributions—tax-free in retirement. (Your Roth account must be at least five years old before you can qualify for tax-free withdrawals.)
Clark is adamant in his opinion that taxes will rise in the future – perhaps even significantly. So unless you’re in one of the highest tax brackets today, paying your taxes now and enjoying tax-free withdrawals in retirement could be a huge financial benefit.
You can go deeper into Roth versus traditional IRAs, or better understand why Clark is obsessed with Roth.
If you or your spouse are the primary breadwinner, it may make sense for both of you to use a spousal IRA.
This is especially a good option if the spouse with the primary income doesn’t have a good 401(k) option at work or has even more money to invest after maximizing their 401(k) contributions.
“Spousal IRA” sounds like a fancy or unique product. In reality, it’s just a label to articulate that you can contribute to your husband’s or wife’s IRA if you file your taxes jointly.