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If your employer doesn’t provide a 401(k) plan or you wish to save more for retirement, an individual retirement account (IRA) may be a good choice. However, in order to contribute to an IRA, you must earn taxable income as defined by the IRS, which includes taxed wages or self-employment income. If you step away from the workforce or earn untaxed income, you won’t be eligible unless...
If you're married and your spouse is still employed, they may be able to set up an IRA on your behalf. Here’s how spousal IRAs function and the advantages they offer.
How Spousal IRAs Function
A spousal IRA isn’t actually a separate type of IRA account—rather, it’s just a traditional IRA or Roth IRA set up in the name of a spouse who has little to no income. This may include those who are caregivers for children or other family members, workers who return to school, or people who have left the workforce for another reason.
To be eligible for a spousal IRA, you have to meet a few requirements:
You must file taxes as “married filing jointly.”
The earning/contributing spouse must make enough to cover the contributions to both their own IRA and the spousal account.
In 2022, the IRA contribution limit is $6,000 per year for those under age 50 and $7,000 for those 50 and older. A couple can contribute a total of $12,000 across both accounts—$13,000 if one person is 50 or older, and $14,000 if both spouses are 50 or older.
There are income-based contribution limits for Roth IRAs and tax deduction limits for traditional IRAs based on your tax filing status. These may affect which type of account you select.
One key to a spousal IRA is that ownership stays with the person named on the account no matter which spouse is contributing. This also means that an existing IRA—funded while the owner of the account was in the workforce—can be a spousal IRA if that person is no longer earning income and their partner contributes to the account on their behalf.
Should you set up a spousal IRA?
If you qualify and have the financial capacity to contribute the maximum to multiple retirement accounts, a spousal IRA might be a good option to consider.
According to Catherine Valega, a certified financial planner with Green Bee Advisory in Massachusetts, spousal IRAs are a perfect solution for many couples.
“In many instances, when one spouse is not employed, they forfeit retirement assets in their name and miss out on tax-deferred growth opportunities as a couple,” Valega explains.
As mentioned, you can opt for either a traditional IRA or a Roth IRA as a spousal account. The traditional IRA allows contributions with pre-tax income, reducing your current tax burden, while the Roth IRA is funded with post-tax income and can be accessed tax-free in the future. Generally, individuals expecting to earn more in the future tend to prefer the Roth IRA, but it’s advisable to conduct research and seek advice from a financial planner if you’re uncertain about which option is best for you.
What happens to a spousal IRA if the couple divorces?
Although spousal IRAs are often seen as a safeguard in case of divorce, the reality is more complex. Depending on when the account was established and the laws in your state, retirement accounts may be classified as marital assets and divided accordingly.
