What Are Spousal IRA’s?
A spousal IRA is a tax advantaged retirement account, but unlike 401K’s it does not require an income from the other spouse to make contributions. Instead the working spouse contributes on behalf of their partner.
This means the working spouse can contribute $6,000 ($7,000 if 50 years or older) into their account and then add an additional $6,000 into their partners account. This is a huge boon to families that may have recently welcomed a new child to the family or one spouse stopped working to return to school.
How Spousal IRA’s Work?
Despite the unique name if you go to your brokerage you won’t find a ‘Spousal IRA” as it were. A spousal IRA is literally just a typical IRA that can be opened with he majority of brokerages. Each spouse continues to maintain their own IRA, either traditional or Roth.
The key component of using a Spousal IRA is that the couple must file their taxes jointly & the working spouse must show enough earned income to offset whatever contributions are made.
For example let’s say a husband who was earning $50,000/year decides to return to school the upcoming tax year. His wife earns $100,000/year and continues to work through that year. As her earned income is over $12,000 she can contribute $6,000 to her IRA and an additional $6,000 to her now non working husbands IRA.
Importance of Funding a Spousal IRA
Long time readers of ours understand the importance of compounding returns. For those of you who are newer though let’s look at a test case of how important that $6,000 can be. Let us assume a husband is making $70,000/year. They have two kids and the wife decides to stay at home to watch out for them. She returns to the workforce 5 years later and maxes out her Roth IRA every year for 25 years.
Assuming 7% annualized returns she would have ~$405,000 after her 25 years. Those are great returns and would set the family up quite nicely. What if the husband had contributed to a spousal IRA during her 5 years with kids though? With an additional $6,000 put down over those 5 years their number jumps up to ~$610,000. Almost $200,000 additional tax free money that is now available to them in retirement due to the Spousal IRA.
Money is often tight for families, particularly for those with only a single income. There is no shame for not being able to maximize both spouses IRA’s. While maximizing accounts is something to strive for even, small increments can have incredible gains. Assuming $100/ month over those same 30 years you would still have ~$120,000 in the account. Compounding returns are the bread and butter of retirement, continually work to cut costs and increased income and invest for your future.
Newly Married Bliss & Tax Advantaged Savings
The IRS in their rigid tax codes oddly does not care what date in the year a marriage occurs. From the IRS perspective this means that as long as you are married before 12/31 of that year you were in effect married for the full year to your spouse.
Not only does this mean tax breaks for your full working year if you are planning on filing jointly with your spouse, but it also means you can get an extra year of Spousal IRA contributions. For my partner and I that meant an additional $6,000 into retirement, while she was finishing up school.
The IRS also does not require contributions to be made before year end, only before you file taxes for the previous year. What this means is that you have until April 15th the following year to save funds to max out a spousal IRA for your partner, something I would strongly suggest if feasible to your situation.
6 Spousal IRA Rules to Remember
We already covered a few of the unique rules for this form of IRA, but let’s summarize them below and add a few more for easy reference:
- There is a $6,000/year maximum contribution to either Roth or Traditional accounts. This is per person and jumps to $7,000 for individuals older then 50.
- The couple Must File Jointly to contribute to the non-working spouses IRA. If you do not over contribute more then $6,000 you will have a 6%/year penalty assessed on the account.
- There are no age limits on either traditional or roth IRA’s.
- The Spousal IRA is not co-owned. It’s in the name of and owned by the nonworking spouse only. Same applies to the working spouses account as well.
- The IRS has strict income limits for a Roth IRA. For a married couple filing jointly the phase out begins at $204,000 and is completely removed at $214,000.
- There are no income limits for contributing to a traditional IRA. If Roth is the desired end goal you can easily back door rollover the amount this year or during retirement.
Wrapping up Spousal IRA
A Spousal IRA is an accessible exemption provided by the IRS. If circumstances require you to go from a two house to a single house income keep this alternative in mind. It allows non working spouses to take advantage of tax advantaged accounts without having to show earned income. As long as you can afford to fund the two IRA’s there is no reason not to take advantage of that opportunity.
Setting up the account is as simple as choosing your favorite brokerage. Add the contribution select your preferred ETF or timed mutual fund and let compound interest work to your advantage.
