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    • What is a spousal IRA and how does it work?
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    What is a spousal IRA and how does it work?

    Umito Posted on

    What is a spousal IRA?

    A spousal IRA is a type of individual retirement account (IRA) to which a working spouse can contribute on behalf of the non-working spouse. Generally, individuals must earn income to contribute to a traditional individual retirement account (IRA) or a Roth IRA. However, if you’re married, you can use a spousal Roth IRA to increase your retirement savings, even if only one spouse works for pay.

    An IRA is a great tool for saving for retirement. These accounts were introduced in the mid-1970s to help workers save for retirement and reduce their taxable income. So it’s no surprise that you must have employment income to contribute and receive the tax benefit of an IRA. Under Internal Revenue Service (IRS) rules, you must have “taxable compensation” to contribute to a traditional IRA or a Roth IRA.

    Despite the income requirement, spouses can have access to a retirement account even if they do not work for pay. Learn about the investment and tax benefits of a spousal IRA.

    Key takeaways

    • A spousal IRA is a type of retirement savings that allows a working spouse to contribute to an individual retirement account (IRA) in the name of a non-working spouse.
    • Usually, an individual must have earned income, but a spousal IRA is an exception, allowing a spouse with earned income to contribute on behalf of a spouse who does not work for pay.
    • A working spouse can contribute to both IRAs, provided they have enough income to cover both contributions.
    • Besides how they are funded, spousal IRAs often have the same rules as “regular” IRAs.
    • The spouse whose name is on the IRA legally owns the funds in the account, even if he or she is not the person who funded the account. The spouse exception defines how contributions can be made.

    Understanding a Spousal IRA

    A spousal IRA is a type of retirement savings strategy that allows a working spouse to contribute to a IRA in the name of a spouse who does not work. Generally, a person must have earned income to contribute to an IRA, but a spousal IRA is an exception since the non-working spouse may have little or no income.

    Contributing to a spousal IRA can provide significant retirement savings for non-working spouses. These non-working spouses may not have access to a retirement plan through their own employer (especially if they do not have an employer). Therefore, the intention behind spousal IRAs is to continue to provide retirement savings opportunities to those who otherwise would not have opportunities.

    Additionally, contributions to a traditional IRA may be tax-deductible, while contributions to a Roth IRA are made with after-tax dollars but may allow for tax-free withdrawals in retirement. Therefore, a spousal IRA (whether traditional or Roth) provides taxpayers with long-term tax benefits that impact current or future taxable income.

    What counts as taxable compensation?

    There are two ways to get taxable compensation: Work for someone who pays you or owns a business (or farm). Taxable remuneration includes the following elements:

    • Wages and salaries
    • Tips and bonuses
    • Commissions
    • Taxable alimony and separate maintenance
    • Self-employment income
    • Tax-free combat salary

    The following types of income do not count as taxable remuneration:

    • Gains and profits from property
    • Interest and dividends from investments
    • Pension or annuity income
    • Deferred compensation
    • Income from certain partnerships
    • Any amount you exclude from income

    Your earned income must match or exceed your IRA contribution. For 2024, you can contribute up to $7,000 or $8,000 if you are 50 or older. So, to contribute in full, you need at least the amounts above. If you earn less, you can contribute up to the amount you earned without the spousal IRA exception.

    If you contribute more than you’re allowed to, you’ll have to pay a 6% penalty every year until you correct the error.

    Spousal IRA Exception

    You can contribute to a spousal IRA on behalf of a spouse who has no earned income. To do this, you must have sufficient professional income to cover both contributions. To fully contribute to both IRAs in 2024, your earned income will need to be at least $14,000, or $16,000 if you are both 50 or older.

    Keep in mind that IRAs are individual accounts (so the individual in the IRA). As such, a spousal IRA is not a joint account. Instead, you each have your own IRA, but only one spouse funds them both. Regardless of who contributes to the spouse’s IRA, the IRA belongs to the person whose name is on the account.

    You must be married and filing jointly to open a spousal IRA.

    To take advantage of a spousal IRA, you must be married and your tax filing statuss must be married filing jointly. You cannot make a spousal contribution to an IRA if you classify separately.

    Benefits of a Spousal IRA

    A spousal IRA is a great way for a spouse who doesn’t work for pay to save for retirement. Without the spousal IRA exception, spouses without earned income may struggle to find a tax-advantaged way to save for retirement.

    If one spouse has already maxed out their own IRA contributions, this can be a great opportunity for couples to improve their tax-advantaged retirement planning.

    Your spouse can name you as the beneficiary of the spousal IRA. But once you start contributing to the account, the money belongs to your spouse. This becomes important if you separate or divorce in the future.

    A spousal IRA remains intact even if the spouse without earned income begins receiving compensation for their work. In this case, they can still contribute to the IRA, according to the usual IRA rules.

    Is a spousal IRA a traditional or Roth IRA?

    A spousal IRA is a regular IRA established in the name of a spouse. You can configure it like either a traditional or a Roth IRA. The biggest difference between the two IRAs is when you get the tax break. With a traditional IRA, you deduct your contributions now and pay taxes later when you make distributions.

    With Roth IRAs, there is no advance tax deductionbut your contributions and your income grow tax-free and qualified distributions are also tax-free. There are other differences as well. Below is a brief overview.

    Roth and traditional IRA: main differences
    Functionality Roth IRA Traditional IRAs
    2024 contribution limits 2024: $7,000 or $8,000 if you are 50 or older 2024: $7,000 or $8,000 if you are 50 or older
    2024 income limits High earners may not be able to contribute High earners may not be able to deduct their contributions
    Tax treatment No tax relief for contributions; withdrawals are tax-free in retirement Tax deduction for contributions; withdrawals taxed as ordinary income
    Required Minimum Distributions (RMDs) No RMD during the account holder’s lifetime; beneficiaries can spread distributions over multiple years Distributions must begin at age 73 starting in 2023. Beneficiaries pay taxes on inherited IRAs

    In general, a Roth IRA is a better choice if you expect to be better off. tax bracket retired than you are now. If so, it’s best to pay your taxes now, at a lower rate, and take advantage of tax-free withdrawals later.

    It’s also a good idea if you think you won’t need to withdraw money from your IRA. There is no minimum distribution required during your lifetime, so that you can leave the entire account to your beneficiaries.

    Spousal IRA and Divorce

    The treatment of Spousal IRA in Divorce may vary depending on the laws of the state where the divorce takes place. The treatment of spousal IRAs may also be subject to the specific terms of the divorce settlement.

    Generally, spousal IRAs are considered marital property and may be subject to division in a divorce. Even though IRAs are owned by each individual when the couple is together, the value of the spouse’s IRA can be divided between the spouses as part of the real estate settlement agreement. Again, this may be subject to specific criteria for each divorce.

    If the spouse’s IRA is a traditional IRA, any withdrawals made during the divorce process will be subject to taxes and penalties. This is especially important to note in situations where the couple may need to withdraw retirement funds in order to pay legal fees associated with the divorce.

    If you specified that your split IRA is a transfer due to your divorce in your agreement, no tax will be collected. This means that if you give half of your IRA to your spouse, they will have to pay tax on everything distributions they withdraw from the account after receiving the funds. You won’t owe taxes on assets if you label your division correctly, but you will both owe taxes and a early withdrawal penalty if not done correctly.

    What is the income limit for a spousal IRA?

    The upper income limit for a spousal Roth or traditional individual retirement account (IRA) is $240,000 for 2024.

    Do I have to file a joint tax return to contribute to a spousal IRA?

    Yes. HAS open a spousal IRAyou must file your taxes as a married person jointly. This is necessary because your tax return serves to verify that the income level is appropriate for these tax-advantaged investment tools.

    Does my spouse’s IRA money belong to me or my partner?

    Once money has been paid into an IRA, it belongs to the owner whose name is on the account. In other words, the funds belong to the non-working spouse, even in the event of divorce or separation. However, all combined and individual assets may be subject to the separation agreement. Depending on this agreement and local laws, assets in a spousal IRA may be divided or shared between spouses.

    The essentials

    A spousal Roth IRA can be a great way to increase your tax-advantaged retirement savings if your household has only one income. You’ll pay taxes now and withdraw funds tax-free later, when you may find yourself in a higher tax bracket.

    It can also be a way to provide some financial security to a spouse who works a lot, but may not be financially compensated for it.

    Remember: A spousal IRA can be structured like a traditional IRA or a Roth IRA. If you’re unsure which type of IRA would best benefit you and your spouse, talk to a trusted financial advisor.

    Umito
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