Maximizing retirement savings can be a challenge, particularly for married couples where one spouse has limited or no income. Thankfully, the IRS provides a tool that can help. A spousal IRA (Individual Retirement Account) enables a non-working or low-earning spouse to contribute to his or her own IRA, as long as the family’s earned income is sufficient, thus providing an excellent opportunity to enhance the couple’s overall retirement savings as well as benefiting from certain tax advantages.
Here’s how a spousal IRA may be able to give your family’s retirement nest egg an extra boost.
The Mechanics of a Spousal IRA
A spousal IRA isn’t actually a distinct type of IRA. Rather, it is a separate IRA opened in the non-earning spouse’s name. Couples must file taxes jointly to qualify, and at least one spouse must have taxable income. The difference between a regular IRA and its spousal cousin is that while a single owner of an IRA must have earned income to contribute, a married individual can contribute on the basis of the spouse’s earnings. Thus a non-earning spouse can build his or her own retirement savings, independent of the primary breadwinner, significantly enhancing overall family savings.
Despite these advantages, spousal IRAs are often overlooked. And that’s unfortunate.
Traditional and Roth Options
Spousal IRAs can be created in both traditional and Roth formats. Each type of IRA has advantages and disadvantages, yet combining them often results in an optimum result for the family as a whole.
Traditional IRA contributions are generally tax-deductible in the year they are made, making them a smart tax move in high-income years. Contributions then grow tax-free until the funds are withdrawn during retirement, at which point they are taxed as ordinary income.
Direct contributions to a Roth IRA, on the other hand, are not tax-deductible. Yet qualified withdrawals are tax-free, including any earnings, provided certain conditions are met. This can be particularly advantageous for those expecting to be in a high tax bracket in retirement.
Tax Advantages, Exceptions and Limitations
As always, however, there are exceptions and limitations. For example, contributions to a traditional IRA may not be tax deductible if the family’s income is too high or if the working spouse is covered by a retirement plan at work. Similarly, direct contributions to a Roth IRA may be limited on the basis of family income. Yet though such limitations may impact the near-term tax advantages of IRA contributions, many overlook the fact that it is always possible to make after-tax contributions to an IRA, including a spousal IRA. And, depending on the circumstances, it may be possible to convert such after-tax IRA contributions to Roth funds with little or no tax impact.
General IRA Rules, Contribution Limits, and Requirements That Apply to Spousal IRA Accounts
No matter which type of IRA you are considering, they share common traits.
In 2024, each spouse under 50 can contribute up to $7,000 annually to an IRA, or $8,000 if 50 or older. The total IRA contribution, however, cannot exceed the taxable earned income reported on the couple’s tax return.
There are also rules regarding withdrawals, whether spousal or individual. Traditional IRAs impose penalties for withdrawals before age 59½ unless specific exceptions apply. Additionally, under the Secure 2.0 Act, required minimum distributions (RMDs) must begin at age 73, increasing to 75, starting in 2033. Roth IRAs do not require RMDs during the owner’s lifetime, but do require non-spouse beneficiaries to take withdrawals over 10 years.
Given the complexities of the tax rules, limitations, and other requirements regarding IRAs, it’s always best to work with an advisor who is familiar with them when considering how to best utilize these strategies. It may even be more advantageous for some couples to save in a taxable brokerage account rather than in an IRA. Yet IRAs in general – and spousal IRAs in particular — remain an underutilized tool in most couple’s financial toolbox.
Conclusion
Contributing to a spousal IRA can not only help a couple build a more substantial retirement nest egg, it can also provide psychological benefits. Non-earning spouses can feel more valued and involved in the family’s financial planning. Spousal accounts can help promote financial independence and ensure access to retirement funds in cases of widowhood or divorce.
As with all savings, the key is to start early, contribute consistently, and adjust your financial plan as your circumstances evolve.
For personalized advice on optimizing your retirement savings, contact your Griffin Black Wealth Advisor. We are here to help you navigate these types of decisions so you can live a balanced life that brings you joy.
