How Couples Can Use a Spousal IRA to Save More for Retirement

You’ve probably heard of a traditional IRA and a Roth IRA. What you may not have heard of is a spousal IRA. If you haven’t, you’re not alone.

Spousal IRAs can be a very powerful tool to help your family invest for your future retirement needs.

Here’s what you need to know about spousal IRAs to take full advantage of this retirement saving opportunity.

What Is a Spousal IRA?

A spousal IRA is technically just like any other IRA. In fact, there is no particular account called a spousal IRA. You simply open a traditional IRA or Roth IRA in a spouse’s name.

The IRA is not jointly owned.

Instead:

It is solely owned by the person whose name is on the IRA account.

So why do people think there is a particular type of IRA called a spousal IRA?

There’s a good reason.

What most people are typically thinking of is called spousal IRA contributions.

Spousal IRA contributions allow your spouse to open and contribute to an IRA even if they don’t work or don’t have enough earned taxable income to fully contribute to an IRA.

Who Can Make Spousal IRA Contributions?

Unfortunately, spousal IRA contributions aren’t an option for everyone. In order to make a spousal IRA contribution, you must file a joint tax return with your spouse.

If you don’t, you can’t make spousal IRA contributions.

That means any couple that files married filing separately or those that file head of household can’t use the spousal IRA contributions.

Sadly, this leaves out a large group of people that may not want to deal with the formalities of getting married.

For 2020 and 2021, the maximum IRA contribution is $6,000 per person.

Spousal IRA contributions allow you and your spouse to contribute up to $12,000 ($14,000 if over 50 years old) even if your spouse has no taxable income of their own.

You cannot contribute $12,000 to one person’s IRA. Instead, you must contribute $6,000 in each person’s individual IRA so you don’t exceed contribution limits.

In addition to filing a joint tax return, you must also have enough taxable compensation to cover the contributions you and your spouse make to IRAs.

If you only have $5,000 of joint taxable income, you can only contribute up to $5,000 in you and your spouse’s IRAs. You can split the $5,000 however you want, but your total contributions cannot exceed your joint taxable income.

If your joint taxable income exceeds the IRA contribution limit times two, you can max out an IRA for yourself and your spouse.

The Usual IRA Rules Still Apply

In addition to the spousal IRA contribution rules, you’ll still need to be aware of and follow the typical traditional IRA and Roth IRA rules.

Traditional IRA Vs. Roth IRA

Traditional IRA

Traditional IRAs may be tax deductible depending on your situation. Your contribution is fully tax-deductible if you and your spouse aren’t covered by a workplace retirement plan.

If you or your spouse are covered by a workplace retirement plan, your tax-deductible contributions may be limited.

In order to see if your tax-deductible contributions are limited, you can refer to a chart on the IRS website.

Taxable contributions can be made even if your tax-deductible contributions are limited. Either way, your total contributions cannot exceed the contribution limit for the year.

The money in a traditional IRA will grow tax-free, but you’ll have to pay income tax on the money when you withdraw from the account in retirement.

If you withdraw money before age 59 and ½, you’ll typically have to pay a 10% early withdrawal penalty in addition to the income taxes you’ll owe.

For 2020, the IRA contribution limit is $6,000 for those under age 50 and $7,000 for those age 50 and older. You can no longer contribute to a traditional IRA once you reach the year in which you’ll turn age 70 ½.

Roth IRA

Roth IRA contributions are never tax deductible. That said, the money you withdraw in retirement will be tax-free in the majority of cases.

Unlike traditional IRA funds, there are some instances in which you can withdraw Roth IRA funds tax and penalty free.

First, you can always withdraw contributions you made, but not earnings, without paying taxes or penalties.

Next, you can withdraw earnings tax and penalty free in certain cases.

If you have owned the account for at least five years, and you meet one of the following circumstances you can withdraw earnings penalty-free:

• You’re making a first time home purchase (you can only withdraw up to $10,000 maximum during your lifetime)
• You’ve become disabled
• You’re age 59 and ½ or older

If you’ve owned the account for less than five years, you may have to pay taxes on earnings you withdraw. You can still avoid the early withdrawal penalty on earnings if:

• You’re making a first time home purchase (you can only withdraw up to $10,000 maximum during your lifetime)
• You’re using the money for qualified medical expenses or educational expenses
• You’ve become disabled
• You’re age 59 and ½ or older
• You structure a special withdrawal plan called substantially equal periodic payments

For 2020, the Roth IRA contribution limit is $6,000 for those under age 50 and $7,000 for those age 50 and older. There is no age limit on making Roth IRA contributions like there is with traditional IRA contributions.

The Benefits of Opening a Spousal IRA

It’s easy to see why opening a spousal IRA can be a great decision after you look at the numbers.

Here are a few examples to show exactly how much extra money you could have at the traditional retirement age of 65 based on the following examples.

Case A: A Spouse Leaves the Workforce with No Spousal IRA Contributions

Let’s say your spouse decides to stay at home with the kids and never returns to the workforce. This occurs when both spouses are age 30. Prior to leaving the workforce, both you and your spouse maxed out Roth IRAs each year.

Without making spousal IRA contributions, you would only be able to make half of the contributions going forward.

In this case, the couple doesn’t know about spousal IRA contributions. Instead of investing the other spouse’s $6,000 in a taxable account, the couple decides to use the other $6,000 to cover their monthly expenses.

Based on this scenario, one person invests $6,000 each year in a Roth IRA starting at age 30. Assuming an 8 percent annual return each year, you’ll have $1,023,554 available to you as a couple when you reach age 65. This only counts contributions made at age 30 and older.

Case B: A Spouse Leaves the Workforce and Takes Advantage of Spousal IRA Contributions

Spousal IRA contributions give you the ability to continue maxing out both Roth IRAs as long as you continue to stay under the income limits and you have the joint taxable income to do so.

In this case, the couple works hard to find a way to continue contributing the maximum allowable amount to a Roth IRA for each spouse.

If you put $6,000 in your Roth IRA and $6,000 in your spouse’s Roth IRA, you’ll double the amount of money available to you at retirement.

Assuming the same 8 percent annual return, you’ll now have $2,047,108 available to you as a couple, instead of just $1,023,554. That’s double the amount of tax-free money available to you in retirement. Again, this only counts contributions made at age 30 and older.

This would allow you to have a higher standard of living in retirement than Case A. Alternatively, you may be able to use the extra money you set aside to retire a few years earlier.

How to Open a Spousal IRA

Now that you understand the true power of spousal IRA contributions, you’re probably wondering how to open one.

Opening a spousal IRA is no different than opening a regular IRA.

The only difference is:

You must make sure you have the joint taxable income to cover the contributions you’re making to open and fund the IRA.

The spousal IRA will need to be opened in your spouse’s name using their personal information. Remember, IRAs cannot be opened jointly so you won’t have any ownership in the account. The funds will belong solely to your spouse.

You can choose to open a traditional IRA or a Roth IRA as long as you meet the requirements for doing so. Just like with any other type of IRA, you can choose where you want to open your account.

Banks, credit unions, and brokerages are your typical places for a spousal IRA.

Once your IRA or Roth IRA is open, you’ll make contributions just like you would to a regular IRA or Roth IRA.

There is no special spousal IRA contribution selection you must make. Just make sure you have enough joint taxable income to make the contribution.