Spousal IRAs

What is it?

A spousal IRA is a type of individual retirement account that allows a working spouse to contribute to a nonworking spouse’s retirement savings. A Spousal IRA creates an exception to the provision that an individual must have earned income to contribute to an IRA. Spouses with some earned income, but not enough to fund an IRA fully, can also qualify for the Spousal IRA.

To qualify, the couple must file a joint tax return. Spousal IRAs can be either traditional or Roth IRAs, and are subject to the same annual contribution limits, income limits and catch-up contribution provisions as traditional and Roth IRAs. While IRAs cannot be held jointly in both spouse’s names, spouses can share their account distributions in retirement.

Benefits of Spousal IRA

The non-working spouse benefits by having assets that are entirely his or her own. The Spousal IRA is a  completely separate account, set up in the non-working spouse’s name. This means that once a contribution is made to that IRA, it belongs entirely to the person who owns it, and not the person who made the contribution. For someone who has left the workforce to help raise a family, for example, this can be a great benefit, since a non-working spouse loses out on that earning power and potential benefits.

As a couple, you can benefit by doubling your household contributions to an IRA. For 2022, the maximum contribution is $6,000. If the working spouse maxes out his or her IRA, and then makes another maximum contribution to the non-working spouse’s IRA, the household now has the ability to contribute $12,000 for the year. The only limitation is that the couple must have at least $12,000 of earned income between them. Each spouse can contribute and deduct an additional $1,000 if he or she will be 50 or older.

If the contribution is to a traditional IRA, then you can benefit from a bigger tax deduction.  If the contribution is to a Roth IRA, then there is more money in the accounts earning interest on a tax-free basis. Either way, the benefit to the couple is increased with the help of a Spousal IRA.

Note:   If you were divorced or legally separated (and did not remarry) before the end of the year, you cannot deduct any contributions to your spouse’s IRA. After a divorce or legal separation, you can deduct only the contributions to your own IRA. Your deductions are subject to the rules for single individuals.

Impact of Participation in an Employer-Sponsored Retirement Plan

Traditional IRA tax deduction rules are the same for spousal IRAs. For married couples with only one working spouse, the amount that can be deducted from taxes depends on whether the spouse who works is covered by a retirement plan at work or not.

If the working spouse is NOT covered by an employer’s retirement plan, then the couple may deduct the full amount of their IRA contributions from their taxes. If the income earning spouse IS covered by a workplace retirement plan, then the contribution to a non-working Spousal IRA may not be entirely deductible.

For example, if the adjusted gross income is below $109,000, the non-covered spouse may still be able to deduct the entire contribution. However, the deduction for contributions for nonworking spouses where the working spouse is an active participant is phased out at adjusted gross income between $109,000 and $129,000.

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