What Is a Spousal IRA?
A spousal IRA is a type of Individual Retirement Account (IRA) that is designed specifically for married couples who do not both work. This type of IRA is often referred to as a “spouse’s IRA” because it is meant to help spouses achieve financial security during retirement.
The IRS defines a spousal IRA as an IRA where one spouse contributes while the other does not. In some cases, the contributing spouse may even contribute more than the non-contributing spouse. However, there are some important differences between a traditional IRA and a spousal IRA.
Traditional IRAs allow individuals to make contributions based upon their income and assets. If you are single, you must file a tax return to determine how much you can contribute. You cannot just put $5,500 into your IRA each year and assume that you will qualify for the maximum contribution amount.
Spouses can use their combined incomes to fund a spousal IRA, regardless of whether they are filing jointly or separately. They can also combine assets such as real estate holdings to maximize their contributions.
However, unlike a traditional IRA, a spousal IRA requires that the contributor and beneficiary be legally married. Additionally, the beneficiary of the spousal IRA must be either a dependent child or a surviving spouse.
If you are married and do not plan to retire together, consider opening a spousal IRA today.
How a Spousal IRA Works
A spousal IRA is a type of Individual Retirement Account (IRA). In a traditional IRA, one person contributes money to the account while another receives distributions based on age. But a spousal IRA lets both spouses make contributions and receive distributions. This gives couples flexibility to manage their finances together.
Contributions made to a spousally IRA are tax deductible. If you’re married, you can split your contribution between yourself and your spouse. You can also withdraw funds from the account at retirement.
You don’t need to worry if you’re married because there’s no income limit on how much you can contribute to a spousal account.
Special Considerations
Married couples are eligible to contribute up to $24,000 annually into a 401(k), 403(b) or 457 plan. This includes both spouses’ earnings, regardless of whether one spouse works outside the home. If you’re single, you’ll still be able to put away some savings, but it won’t be nearly as much as what a couple could contribute. You can make contributions to either your individual account or joint account, though you must file jointly to claim the tax benefits.
A spousal IRA is another option for saving for retirement. Unlike a traditional IRA, a spousal IRA is set up specifically for married couples. Contributions to a spousal IRA are limited to $1,000 per month ($12,000 per year). However, unlike a traditional IRA, a spouse can withdraw funds from his or her spousal IRA without paying taxes.
The maximum contribution amount for a spousal IRA depends on how old you are. Those under age 50 can contribute up to $5,500 each year. From ages 50 to 59, you can contribute up to $6,500. And from 60 to 70, you can contribute up $7,000.
Spousal IRA Example
A married couple contributes $5,500 into a joint account. They are both over age 50 and have earned income. Their combined income is less than $150,000. If they want to make additional contributions, they must do it together. If one person wants to contribute more than $5,500, he or she cannot use the extra funds to increase the amount already being contributed by the other person. This rule applies even if the individual making the initial contribution earns more than the other person.
If you are single and earn too much to qualify for a traditional IRA, consider opening a spousal IRA. You can open a spousal IRA regardless of whether you’re married or living together. However, if you are married, you cannot contribute to your spouse’s IRA unless you meet certain requirements.
The IRS allows individuals to contribute up to $5,500 per year ($6,500 if you are over age 50). Individuals who work for employers that offer matching contributions can add an additional $1,000 to their annual contributions. For example, if an employer matches half of what you put into your account, you can contribute up to $7,000 per year ($8,000 if you are over 50).
You can contribute to a spousal IRA either directly or indirectly. Direct contributions include those made to a spousal trust. Indirect contributions include those made to another type of IRA, such as a regular IRA or Roth IRA.
Contributions to a spousal account don’t affect your ability to take advantage of any tax breaks associated with contributing to an IRA. Contributions to a spousal fund aren’t deductible for federal income taxes purposes. However, unlike most types of IRAs, there is no required distribution upon death. Instead, distributions are based on how much money is left in the account.
Spousal IRA Rules
A traditional IRA lets you deduct contributions and earnings while you are alive. If you contribute $5,000 per year for 10 years, you can claim up to $50,000 of tax savings over those 10 years. But once you pass away, you lose access to those deductions. You must begin withdrawing money from the account within five years of death or face taxes on the full amount withdrawn.
With a Roth IRA, you don’t pay taxes on your contribution, but you do owe income taxes when you withdraw it. So, if you put in $5,000 for 10 years, you’ll end up paying taxes on $45,000 ($10,000 x 10). Your spouse can continue contributing to the same account without having to worry about taxes because he/she won’t owe anything. When you die, however, your spouse loses the ability to contribute to the account. He/she will owe taxes on the entire amount withdrawn.
The good news is that you can convert a traditional IRA into a Roth IRA. This gives your surviving spouse the opportunity to keep the account intact. There are some rules though. First, you cannot rollover funds from another retirement plan into a Roth IRA. Second, you cannot use pre-tax dollars to fund a Roth IRA. Third, you cannot convert more than $1 million worth of assets into a Roth IRA. Finally, you cannot convert a Traditional IRA into a Roth IRA unless you’re under age 59½.
If you decide to go ahead with the conversion, you’ll have to wait until you turn 70 ½ to start drawing down the principal. Once you reach that age, you can withdraw the balance, plus earnings, tax free.
Spousal IRA Tax Deductions
The IRS allows married couples to contribute up to $5,500 ($6,500 if filing jointly) to a Traditional IRA each year. You must make this contribution yourself, and it cannot come out of your paycheck. However, there is no limit on how much money you can put into a Roth IRA.
If your spouse is not covered under a workplace retirement plan, you can deduct all contributions to both a Traditional IRA and a Roth IRA. This includes contributions made during the tax year.
If your spouse works for a company that offers a 401(k), 403(b) or 457(b) plan, he/she may already be contributing to one of those plans. In this case, you can only deduct half of your total Traditional IRA contribution.
Creating a Spousal IRA
A spousal IRA is similar to a traditional IRA except it is owned solely by one person. If you are married, you can set up a spousal IRA for yourself and your spouse. This way, both of you can make contributions to your IRAs without having to file separate returns. You don’t even need to open your own account; you can just use your husband’s or wife’s name.
If you do decide to open your own IRA, there are some things you’ll need to know about how to go about doing it. Here are three important things to keep in mind:
1. You must have earned income.
2. You can only contribute $5,500 per year ($6,500 if you’re age 50 or older).
3. You cannot deduct contributions to your IRA on your federal taxes.
Opening a spousal IRA
The IRS says opening a spousal IRA is easy if you are married. You just need to file Form 8606, which asks about your spouse’s income and assets. If you both qualify, you can open a joint account. Then, you can contribute up to $5,500 per person ($11,000 total). After that, you can make additional contributions.
If you are filing separately, you still must complete Form 8606, but it doesn’t ask questions about your spouse. Instead, you’ll fill out Form 8841, which asks how much you earn and what you do for work. If you meet certain criteria, you can open a spousal IRA too.
You can add funds to your spousal IRA throughout the year. And since there is no limit on withdrawals, you can take distributions whenever you want without penalty. But keep in mind that withdrawing early could cause problems. For example, if you withdraw earnings during the first three months of the year, you won’t receive a refund of taxes paid in 2018. Also, if you withdraw earnings within five years, you’ll owe a 10% federal excise tax.
Frequently Asked Questions
Can I contribute to an IRA if I participate in a retirement plan at work?
You can still contribute to a traditional IRA even if you participate with a different retirement plan through your employer. But there are some restrictions. For example, you may not be eligible to deduct all of your contributions if you or your partner participates in another retirement plan through work. And you may be subject to limits on how much you can contribute to a Roth IRA if your income exceeds a particular threshold.
How Can a Nonworking Spouse Plan for Retirement?
There are several types of IRAs. One type allows individuals to put money into a traditional IRA. Another type lets individuals put money into an SEP IRA. A third type lets individuals put money in a SIMPLE IRA. All three allow individuals to contribute up to $2,400 per year to a Traditional IRA. Individuals can contribute up to $6,500 to a Roth IRA.
