Spousal IRA: What it is & how it works

Spousal IRA: What it is & how it works

01.05.2024

Tax-advantaged retirement accounts are the best ways to save for retirement, but they’re generally only available to people with income. After all, a stay-at-home parent or someone who works in the home in some other capacity doesn’t have access to a 401(k) plan.

In most cases, an individual retirement account (IRA) is like other tax-advantaged accounts where you must have taxable income to qualify. However, the IRS offers an important exception known as a spousal IRA for married individuals where only one spouse has income.

A spousal IRA can be an excellent way for stay-at-home parents, homemakers, and other spouses without their own income to prepare for retirement without having to rely solely on their spouse’s retirement accounts.

What is a spousal IRA?

A spousal IRA is an individual retirement account that allows married individuals to save for retirement based on their spouse’s taxable income rather than their own. Functionally, a spousal IRA is no different than any other IRA — the only difference is whose income the contributions are based on.1

Like other individuals, non-income-earning spouses can choose between a traditional IRA and a Roth IRA — or use a combination of the two. Here’s how those work:

  • Traditional IRA: Contributions are pre-tax, lowering your taxable income for the current year. Investment earnings are tax-deferred, but withdrawals are taxable.2
  • Roth IRA: Contributions are after-tax, meaning there’s no upfront tax benefit. However, investment earnings and withdrawals are both tax-free.3

It’s important to note that both traditional and Roth IRAs have income limits. In the case of a traditional IRA, if your spouse has access to an employer-sponsored retirement plan, your ability to deduct your contributions may be limited if their income is above a certain threshold.4 And in the case of Roth IRAs, you may be prohibited from contributing at all if your spouse’s income is too high.5

Read more: What is a Roth IRA?

When you’re deciding between a traditional and a Roth IRA, it’s important to consider your and your spouse’s overall financial situation and goals. The traditional IRA offers an upfront tax advantage, while the Roth IRA offers a tax advantage during retirement.

If your family currently has a high household income and wants to reduce your tax burden, a traditional IRA may help you do that (as long as your spouse’s income isn’t too high for deductible contributions). On the other hand, if your family has a relatively low income and a tax break during retirement might be more beneficial, you may want to opt for a Roth IRA.

Finally, know that you don’t have to choose between the two. You can contribute to both a traditional and a Roth IRA as long as your household income allows it.

Spousal IRA vs. other retirement accounts

A spousal IRA offers similar advantages to other retirement accounts but with some important differences. Workplace retirement plans like 401(k)s, 403(b)s, and others are only offered by employers. If you don’t work for an organization that offers such a plan, you can’t use one.

An IRA, on the other hand, allows people with taxable income — or people whose spouses have taxable income — to save for retirement regardless of access to workplace retirement plans.

IRAs are especially important for spouses who don’t have their own income, as they’re really the only opportunity those individuals have to enjoy the benefits of tax-advantaged retirement savings.

Benefits of spousal IRAs

Spousal IRAs have some major advantages. If you don’t work outside the home but your spouse has earned income, here are some reasons you should consider a spousal IRA:

Double the contributions

Opening and contributing to a spousal IRA essentially allows you and your spouse to double your IRA contributions each year. Rather than being able to save $7,000 (based on the 2024 contribution limits), you can save $14,000. And that’s on top of any contributions the income-earning spouse makes to a workplace retirement plan.

Read more: What are the tax benefits of marriage?

Tax benefits

Both traditional and Roth IRAs have significant tax benefits. Either you’ll enjoy a tax break each year that you make a contribution, or you’ll enjoy tax-free income during retirement.

Sure, you could save for retirement in a taxable brokerage account, but the tax savings over the decades leading up to retirement could mean a difference of hundreds of thousands of dollars.

Saver's Credit

Contributing to a spousal IRA allows you to take advantage of a tax credit called the Retirement Savings Contribution Credit — or simply the Saver’s Credit.6

The Saver’s Credit is available to individuals who meet the following requirements:

  • They are 18 years or older
  • They aren’t a dependent on someone else’s tax return
  • They aren’t a student

The amount you can contribute is based on your income but could range from 0% of your contribution for those with household incomes above the threshold to 50% for those with lower household incomes.

Long-term retirement planning

When you’re out of the workforce to raise children, care for your home, or for any other reason, financial goals like retirement may take a back burner. But it’s just as important for you — and possibly even more important — to prioritize retirement savings as it is for those with taxable income.

Two of the most important predictors of being able to save for a comfortable retirement are consistent contributions and time in the market. Investing regularly and letting your money grow for many years will give you the best chance at reaching your retirement goals. And that includes saving diligently during the years you’re out of the workforce.

Spousal IRA rules

Before you open and contribute to a spousal IRA, make sure you’re familiar with the eligibility requirements, contribution limits, and withdrawal rules.

Eligibility criteria

Not everyone is eligible to contribute to a spousal IRA. First and foremost, to contribute to an IRA, someone generally must have earned income. However, a spousal IRA allows individuals to contribute based on their spouse’s earned income rather than their own. That means that to be eligible, your spouse must have earned income.

Another key eligibility requirement is that you and your spouse file a joint tax return. If you are married but file separately, you aren’t eligible.

Finally, each type of IRA has its own eligibility requirements that both working and non-working spouses must abide by. For a traditional IRA, there’s an income cap that limits who can deduct their contributions if one spouse also has access to a workplace retirement plan. And in the case of Roth IRAs, an income cap restricts who can contribute at all.

Visit the IRS website to see how much you can contribute based on your household income.

Ownership of the spousal IRA

Unlike taxable brokerage accounts, retirements are always individually owned. And in the case of a spousal IRA, even though eligibility is based on the working spouse’s income, the account is owned entirely by the non-working spouse.

Some couples may find this factor to be a technicality, while others may find it to be important. Ultimately, even if you and your spouse have joint finances, having an account solely in your name can be beneficial and empowering.

Contribution limits for Spousal IRAs

The IRS limits how much someone can contribute to an IRA each year. In 2024, the contribution limit is $7,000 per year, up from $6,500 in 2023. Additionally, workers who are 50 or older can make a catch-up contribution of $1,000 in 2024.7

Read more: Roth IRA contribution limits

Impact of the working spouse's own IRA on spousal IRA contributions

One important note about IRA contributions is that they are limited by your earned income. You cannot contribute more than 100% of your taxable income during any given year. So, if an individual earns more than $7,000, they can max out their 2024 IRA contributions. But if they only earn $5,000, that’s the most they can contribute.

In the case of married individuals, both spouses’ combined contributions can’t exceed the total taxable income for the household. In most cases, you and your spouse can each contribute $7,000 to an IRA, for total contributions of $14,000. But if the working spouse earns less than $14,000, then contributions will be limited by the actual amount of taxable income.8

Consequence of exceeding contribution limits

If you contribute more than your maximum contribution limit to a spousal IRA, you’ll have the chance to fix your mistake. The IRS gives you until the deadline for filing your taxes to withdraw any excess contributions. However, if you fail to withdraw your excess contributions, they’ll be taxed at 6% per year that they remain in the account.9

Age restrictions and withdrawal rules

Non-working spouses contributing to IRAs are subject to the same age and withdrawal restrictions as working spouses.

First, there’s no age restriction on contributing to either a traditional or a Roth IRA. As long as there is earned income for the household, you can still contribute. However, there is an age limit on withdrawals. Generally speaking, withdrawals made before age 59 ½ that don’t meet certain exceptions will be subject to an early withdrawal penalty on top of any income taxes owed.10

Depending on the type of IRA you have, you may also be subject to required minimum distributions (RMDs). The IRS requires that you start taking taxable withdrawals from your IRA starting at age 73 (or 72 if you turned 72 before December 31, 2022).11

RMDs are only required for pre-tax accounts like traditional IRAs. You won’t have to take RMDs from a Roth IRA.

How to open a spousal IRA

The process of opening a spousal IRA is identical to opening any other IRA. Here’s a step-by-step guide:

  1. Choose a financial institution or brokerage firm: Many different financial institutions and brokerage firms offer IRAs. When choosing the right provider, consider the fees they charge and the investments they offer. You may decide to open your IRA with the same provider as any other household investments you have to keep things simple.
  2. Complete the necessary paperwork or documentation: When you apply for your spousal IRA, you’ll have to provide personal identifying information, such as your name, photo identification, and Social Security number. You may also have to provide information about your household income to ensure your contributions fall within the rules.
  3. Fund your IRA: Once your spousal IRA is open, you can fund the account by connecting a bank account. You can deposit your full annual contribution at once or set up monthly contributions. Just make sure your contributions don’t exceed your household income or the contribution limits set by the IRS.
  4. Direct your investments: Just contributing money to your spousal IRA isn’t enough — you must also invest it for it to grow. You can choose from nearly any type of investment, including individual stocks and bonds or diversified investments like mutual funds and exchange-traded funds (ETFs).

Managing a spousal IRA

Opening a spousal IRA is an important step, but it’s only the first step. Once your account is open and you’ve started contributing, you’ll also have to manage the account on an ongoing basis.

As we mentioned, one of the most important steps in contributing to a spousal IRA is choosing your investments. There’s no one-size-fits-all approach to investing. However, it’s important to build a diversified portfolio that fits your financial goals and risk tolerance.

It’s a tall order to build a retirement portfolio from scratch, so there are some investment tools that can help. Mutual funds and ETFs are diversified funds that include many underlying securities, including stocks and/or bonds.

If you’d prefer an even more hands-off approach to investing, there are two primary options. First, you can invest in a target-date fund, which is a customized fund that corresponds to your estimated retirement year and is adjusted over time based on how far away you are from retirement.

The other option is a robo-advisor, which is a digital investing tool that uses an algorithm to build you a diversified fund made up primarily of index funds.

Finally, while retirement investing is a long-term strategy that largely benefits from a set-it-and-forget-it approach, you can’t ignore your investments entirely. As you go through different life phases and get closer to retirement, you’ll need to adjust your investments to correspond with your time horizon and retirement goals.

A final consideration when opening and managing a spousal IRA is how it fits into your family’s overall financial plan. Your spousal IRA is likely just one piece of the puzzle when it comes to your household retirement plan. It’s important to look at it in conjunction with your other investments rather than on its own.

Additionally, it’s important to ensure you’ve set up a beneficiary on both your spousal IRA and your spouse’s retirement accounts. Doing so can ensure one spouse’s account asset seamlessly transfers to the other spouse in case one spouse passes away.

The bottom line

A spousal IRA is an excellent way to save for retirement if you don’t work outside the home, but your spouse does. Homemakers and stay-at-home parents are often left behind when it comes to saving for retirement. And while your spouse’s retirement accounts may be considered joint assets in your eyes, that’s not technically the case. It’s important to have your own money for retirement.

Before opening a spousal IRA, make sure you fully understand the eligibility requirements and contribution rules. Finally, consider how your spousal IRA fits into your family’s overall investment and retirement plan and what investments are best suited to your unique situation and goals.

 

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  1. IRS. “Retirement Topics — IRA Contribution Limits.”  November 2023.
  2. IRS. “Traditional IRAs.” November 2023.
  3. IRS. “Roth IRAs.” November 2023.
  4. IRS. “IRA Deduction Limits.” November 2023.
  5. IRS. “Amount of Roth IRA Contributions That You Can Make for 2023.” November 2023.
  6. IRS. “Retirement Savings Contribution Credit (Saver’s Credit).” November 2023.
  7. IRS. “401(k) limit increases to $23,000 for 2024, IRA limit rises to $7,000.” November 2023.
  8. IRS. “Retirement Topics — IRA Contribution Limits.”  November 2023.
  9. IRS. “Retirement Topics — IRA Contribution Limits.”  November 2023.
  10. IRS. “Publication 590-B (2022), Distributions from Individual Retirement Arrangements (IRAs).” November 2023.
  11. IRS. “Retirement Topics — Required Minimum Distributions (RMDs).” November 2023.

The Currency editors

Staff contributors

The CurrencyTM, a publication from Empower, covers the latest financial news and views shaping how we live, work, and play. We keep you current on ways to plan, save, and invest for life.

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