Spousal IRA

Published on :

21 Aug, 2024

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A spousal IRA is a subset of an Individual Retirement Account (IRA) in which a working spouse deposits proceedings on behalf of their partner who earns modestly or does not have an income. Spousal IRA rules are exceptions to the typical IRA account, where an individual must earn an income to contribute to an IRA account.

These IRAs are regular traditional or Roth IRAs that married couples use to invest, keeping a long-term horizon in mind. Each spouse gets allotted an individual IRA account where they can each contribute $6,000 towards the investment annually or $7,000 each if they are above 50 years of age. However, the working spouse's income must equal or more than the income contributed in both accounts.

What Is A Spousal IRA?

Spousal IRA is an investment strategy where the earning spouse can contribute to their partner’s Individual Retirement Account (IRS).
To be eligible to contribute to their spouses’ retirement investment, married couples must file their yearly tax returns jointly.
Irrespective of the funding party, the account is considered an individual account. The contribution ceiling is $6,000 per individual below 50 years of age and $7,000 for those above it.
The non-working spouse holds absolute ownership and can choose beneficiaries without the consent of their contributing partner.

How Does Spousal IRA Work?

A spousal IRA is an investment strategy that allows a working spouse to contribute on behalf of the spouse that earns little to no income. One must note that both spouses' contributions are not held in a joint account. Instead, two separate accounts are allotted for both parties.

The spousal IRA account are typical IRA accounts allotted to individuals. There is no “spousal” or joint account for IRA. A spousal IRA is essentially a spouse contributing to their partner’s account instead of them doing it on their own.

To qualify under the spousal IRA rules, the couple must file joint returns during their yearly filing of tax returns. The investment in a spousal IRA grows at 6% annually and is a viable source of risk-free investment for a couple to prepare for retirement. In addition, banks, credit unions, brokerage companies, and savings and loan associations insured by the feds offer IRAs upon sorting approval from the Internal Revenue Service (IRS).

Thus, this kind of spousal IRA account arrangement is very useful for couples in which one spouse does not have a stable income or no income at all. It is a valuable tool for such non-working spouses because it provides a source for saving money in times of emergency or retirement. This arrangement has rules that are almost the same as a typical IRA, but some special considerations are dependent on the financial condition of the couple. However, it is advisable to take the help of any expert or professional who is knowledgeable in financial advisory services tax planning or retirement planning.

Rules

While applying or contributing to an IRA, it is helpful to be aware of the rules mentioned below:

#1 - No Age Limits

There are no restrictions in terms of spousal IRA age limits. Irrespective of age, the working spouse can continue contributing to their partner's accounts as long as one of the two is working.

#2 - Filing Joint Returns

To qualify under the spousal IRA rules, the couple must file their yearly tax returns jointly.

#3 - Beneficiary

Regardless of who contributes to the IRA, the individual will decide who will receive the amount in the account holder's death situation. The non-working spouse doesn't need to name their partner as their spousal IRA beneficiary. They can name someone else as the beneficiary without their partner's consent.

#4 - Ownership

The account holder holds absolute decision-making authority irrespective of who contributes funds towards retirement planning. When contributions are made to the traditional spousal IRA, each spouse will continue to remain the owner of the account. It does not depend on the source of the contribution to the fund. Any decision related to fund allocation any kind of withdrawal will be independently and solely taken by the spouse who is the owner of the IRA.

How To Open?

Now let us learn the procedure to open the account. Even through the term used to describe the process is spousal IRA, the method of opening an account for the same will be no different than a regular account for IRA. In the process, the individual will first have to decide what kind of account they wish to open. Then comes the step where the individual will decide to go to a particular financial institution which will assist in opening the same.

It is necessary to provide a list of personal information traditional spousal IRA since such information will be kept on record and for the purpose of remitting any tax reforms in the coming future. Once the account has been opened in the particular financial institution, the individual can start depositing funds in the account, keeping in mind the limits and rules as discussed above.

After depositing the required funds, it is possible to invest the amount in some specific investment options. The financial institution will continue sending statements regarding the investment details and other information for the account holder’s record. Often the details can be viewed online if such facility is provided to the account holder.

Contribution limits

It is essential to be aware of the spousal IRA income limits and contribution limits to be able to utilize the facility better. Let us study the same.

Spousal IRA limits are the same in terms of contribution as any other IRA. $6,500 for each individual can be the maximum contribution as on 2023. But this has been increased to $7000 in 2024.

However, if the individual is above 50 years of age or more, they can contribute $7,800 annually. For the tax year of 2023, to increased to $7500. The IRS allows each spouse to contribute the maximum limit amount annually. Therefore, the working spouse can contribute a maximum of $13,000 towards the IRA to individual accounts and if both are aged 50 or more than that, then the contribution can be upto $15000. This is as per 2023.

However, as per 2024 rules, the maximum limit is $16,000 if aged 50 years or above. But for each account the contribution limit is capped to the individual limits.

Example

Let us take an example to understand how the process spousal IRA income limits and other rules works in real life.

We assume that Nancy and Allan are now a couple. But before their marriage, they already had Roth IRA account belonging to them which they funded on their own. However, after they got married, the couple now has a a child. Allan stays at home to care of the child and Nancy has a full-time job from which she makes around $ 120,000 annually.

Now the couple is thinking or planning to save a significant amount in their IRA for the tax year of 2023. So now, as we have already seen from the details regarding contribution limit given above, they, individually can contribute upto $6500, which is maximum limit. So, this amount in total for both, will be $13,000, which is again maximum that a working spouse can contribute, since both are aged below 50 years. This could have gone to $15000 if both were more than 50 years.

Tax Deduction

The tax deduction rules for a spousal IRA are identical to that of a traditional IRA. However, for a couple filing their tax returns, where only one is working, the deductions rely on whether their company covers their retirement plan.

For an individual in best spousal IRA whose retirement plan is covered by their workplace, the phase-out ranges between $116,000-$136,000. On the flip side, if the working spouse's company does not cover the retirement plan, the phase-out range is from $218,000-$228,000.

The phase-out range is the taxpayer’s eligibility for tax credits gradually reduced when they approach the upper limits of income to qualify for such credit.

Rollover

In a circumstance where the deceased spouse’s IRA contributions are passed on to the surviving spouse as a beneficiary, it is called a rollover in case of best spousal IRA.

However, they cannot treat the contributions inherited from their spouse as their own, especially if the surviving spouse of not above the age of 72. According to the IRS’s RBD or Required Beginning Date, an individual has to attain the age of 72 to be able to start their gradual withdrawal from their IRA accounts.

Therefore, a general practice among surviving spouses is to claim ownership of the spouse’s IRA. In that case, the deceased spouse’s account is added to the assets of the surviving partner.

Spousal IRA Vs Inherited IRA

Spousal IRA and Inherited IRA are subsets of the Individual Retirement Account. However, there are differences in contributions, ownership, and other factors. Let us understand the differences through the table below:

Basis	Spousal IRA	Inherited IRA
Definition	It is an IRA account where the earning spouse contributes to their partner who earns a modest or no income.	An inherited IRA is commenced when the original owner of the IRA passes away. It is carried out through their IRA or as a part of the retirement plan from their employer.
Contributions	The earning spouse can contribute to their partner’s IRA account up to the maximum yearly limit.	The individual who inherits can make no extra contributions to the inherited IRA.
Withdrawal	The spouse can gradually withdraw the amount from their IRA after attaining the age of 72.	According to the SECURE act of 2019, the beneficiaries who are not the deceased's spouse must withdraw the amount within a decade.
Ownership	It is a separate account in the individual's name, irrespective of who contributes the funds to the account.	For spouses, they can choose to roll over the funds from the inherited IRA to their existing IRA or hold a separate account for the inherited amount. For non-spouses, they are allotted a separate inherited IRA account.
Taxation	Until the individual reaches the age of 72, there is no tax levied. After that, however, each distribution or withdrawal is taxable.	Inherited IRAs have deferred tax implications. Therefore, early withdrawal penalties are levied at 10%. Nevertheless, the rule differs from the relationship with the original holder and the period before distributions or withdrawals are made.

Thus, the above are some important differences between the two type of IRA. It is necessary to understand these differences so that the individual can use these concepts to their best advantage and not get confused with the various rules and regulations. However, it is best to consult a professional who is an expert in such field and who can provide the necessary guidance in such context.

Frequently Asked Questions (FAQs)

1. How to open a spousal IRA?

Anyone who wants to open a spousal IRA account can do so from an IRA broker or an automated financial advisor (often referred to as Robo-advisor). Applicants must submit basic information such as date of birth and social security number. The amount deposited in this account provides a return of 6%.

2. Are there income limits for a spousal IRA?

The income of the earning and contributing spouse has to exceed the amount contributed. The spousal IRA limits allow a maximum contribution of $6,000 annually for each account. However, if the individual is above 50, a maximum contribution of $7,000 is allowed.

3. Who is eligible for a spousal IRA?

A married couple has to file their yearly tax returns jointly, irrespective of who makes the contributions to the account, to be eligible to contribute to a spousal IRA. There are no age restrictions to make contributions. However, the contributions cannot be more than the income disclosed in the joint returns.

4. Is a spousal IRA a separate account?

Yes. Regardless of who contributes to the IRA, the account is treated as an individual account. However, to be able to contribute for a non-earning spouse, the married couple must file their joint tax returns to be eligible.