How Married Couples Can Use a Spousal IRA to Make the Most of Tax-Advantaged Retirements Savings

• A spousal IRA allows single-income families to fully fund two separate IRA accounts.
• In order to qualify for a spousal IRA, a couple must be married and file a joint tax return.
• Income, contribution limits, and all other rules are no different for a spousal IRA than any other IRAs.

One of the rules for IRAs is that you must have earned income in order to contribute to them. However, there is an exception that allows an income-earner to contribute money to their non-working spouse’s IRA.

What is a spousal IRA? 

A spousal IRA isn’t any different from an IRA you would your contribute to as an incomer earner. They have the same characteristics such as contribution limits and withdrawal rules. The only exception is that the working spouse funds the account, which the non-working spouse owns.

You must be married and file a joint tax return in order to qualify for a spousal IRA. In 2021, a little more than a quarter of married-couple families had only one employed spouse, according to the Bureau of Labor Statistics.

The idea behind spousal IRAs is to enable married couples with a single wage earner to boost their tax-advantaged retirement savings. With a traditional IRA, you can deduct contributions from your taxable income and pay income tax when you make withdrawals. Roth IRAs are funded with post-tax money, and you can withdraw money from them tax free when you retire.

How do spousal IRAs work? 

It’s just as easy to open a spousal IRA as a regular one. Choose between a traditional or Roth account when you open it, based on your personal savings goals. The contributions will come from the working spouse on the other spouse’s behalf.

If the non-working spouse had already opened an IRA while working, that same account can serve as the spousal IRA when they no longer have an income.

Spousal IRAs are not shared accounts. They are in the spouse’s name only and owned as a standalone account. The owner isn’t required to consult the employed spouse about the account decisions, such as the beneficiary designations, asset allocation, and withdrawals.

What are the rules for a spousal IRA?

Contributions limits for spousal IRAs are the same as those for all IRAs. For 2022, the maximum is $6,000 if you’re under age 50, and $7,000 per year if you’re 50 or older. That means the total amount a couple could save in IRAs is $12,000 per year (or $14,000 if you’re both 50 or older).

As with any IRA, people who want to open and contribute to a spousal IRA must meet certain criteria. According to the IRS, a married couple must:

• File a joint tax return
• Have adjusted gross income (AGI) of no more than $204,000 to make maximum contribution
•  Have AGI between $204,001 and $214,000 to make partial contribution (AGI of more than $214,000 ineligible)
• Contribute no more to the combined IRAs than the taxable compensation reported on your joint tax return

Advantages of a spousal IRA

There are significant benefits couples with one non-working spouse can gain from contributing to a spousal IRA.

Justin Stevens, a CFP® professional and president of O’Keefe Stevens Advisory in Rochester, New York, describes how his own family used one as part of their financial strategy:

“We have young kids and it was more cost-effective for my wife to stay home than it was to send two children to daycare,” Stevens says. “When she left her job that provided employment income, she wanted to be able to continue saving for her retirement. We used the benefits of the spousal IRA to keep saving $6,000 per year while she stayed home with our family. When she returned to work, she was able to continue saving for retirement in the same IRA, without interruption.”

It helps the couple double down on saving for retirement. Even if only one spouse is working, their retirement strategy must produce enough income to cover both of them. Spousal IRAs can make a big difference in the amount of money you end up with in retirement.

For example, let’s say you put $500 monthly into a spousal IRA starting at age 35 and continued at that rate until age 65. Assuming an average 6% rate of return, with the effect of compound interest you’d have a balance of more than $477,000 when you reach retirement.

Using a traditional IRA as a spousal IRA can also be part of a tax strategy for higher-income households with just one working spouse, as contributions to it can be deducted from their taxable income.

“The spousal IRA allows for additional tax-deferred income to help offset income taxes at the federal and state levels,” Stevens says.

How to open a spousal IRA 

Opening a spousal IRA is a simple process and shouldn’t take very long. Be prepared to share your personal identifying information.

• Choose where to open the IRA.
• Decide if you want to open a traditional IRA or a Roth.
• Designate the owner of the account as the non-working spouse.
• Choose your funding option. You can transfer funds automatically from your bank at regular intervals or make annual lump sum payments.