Spousal IRA Contributions Best Practices Guide

Are you and your spouse looking for an effective way to maximize your retirement savings and take advantage of significant tax benefits? A spousal IRA might be the perfect solution for you. This comprehensive guide will provide you with all the information you need to understand, open, and manage a spousal IRA to secure your financial future together.

Key Takeaways

  • Spousal IRAs are a beneficial retirement savings tool for married couples, providing an annual contribution limit of up to $12,000 and the potential to increase tax-saving potential.
  • Couples should consider traditional vs Roth Spousal IRAs when deciding which is most appropriate for their financial goals & circumstances.
  • Seeking professional advice can help identify the best type and approach of spousal IRA contributions based on your unique situation.

Understanding Spousal IRAs: Definition and Benefits

Spousal IRAs are individual retirement accounts designed for married couples, allowing a working spouse to contribute to a non-working spouse’s IRA. These accounts can significantly increase the couple’s tax-saving potential and serve as a potent asset for accumulating wealth, as long as the spousal IRA rules are followed. The annual contribution limit for a spousal IRA is $12,000, which means that you can contribute up to this amount to an IRA for your spouse, maximizing your combined retirement savings.

Special income rules must be considered when contributing to a non-working spouse’s IRA, such as the taxable compensation reported by the working spouse. However, the benefits of a spousal IRA far outweigh the complexities of navigating these rules. Next, we’ll examine the differences between traditional and Roth spousal IRAs and their potential benefits to your retirement savings strategy.

Traditional vs. Roth Spousal IRAs

Appreciating the benefits of spousal IRAs necessitates a clear understanding of the distinctions between traditional and Roth IRA plans. Both types of IRAs can be used as spousal IRAs, and the couple must be married filing jointly to be eligible.

A traditional spousal IRA, also known as an individual retirement account, allows you to contribute to an IRA, making tax-deductible contributions and reducing your taxable income for the year. However, the deductibility of your contributions may be restricted or annulled if you participate in an employer-sponsored retirement plan, such as a 401(k).

In contrast, a Roth spousal IRA has the following features:

  • Contributions are made with after-tax funds
  • Withdrawals during retirement are tax-free
  • It’s possible to circumvent the income restrictions on contributions to a Roth IRA by utilizing a backdoor Roth IRA strategy.

Choosing between a traditional and a Roth spousal IRA depends on your specific financial goals and circumstances. For example, if you expect to be in a higher tax bracket during retirement, a Roth IRA might be more advantageous. On the other hand, if you anticipate being in a lower tax bracket in retirement, a traditional IRA may be a better fit.

Before deciding, consider carefully the advantages and drawbacks of each type.

Eligibility Criteria for Spousal IRAs

To be eligible for a spousal IRA, couples must file their taxes jointly. One of the most significant advantages of a spousal IRA is that employment is not necessary for eligibility. As long as one spouse has sufficient earned income to cover contributions for both parties, the other spouse is able to contribute to a spousal IRA.

Furthermore, there is no maximum age limit for contributing to a spousal IRA. As long as the income requirements are met, contributions to either a Roth or traditional IRA can be made without regard to age. This flexibility makes spousal IRAs an attractive option for couples with varying income levels and ages.

Contribution Limits and Income Restrictions

Contribution Limits and Income Restrictions

Spousal IRAs are subject to the same annual contribution limits as individual IRAs. For 2024, the annual contribution limit is $7,000 per individual and $8,000 for individuals aged 50 or older. For 2023, the limit is $6,500 for all individuals and $7,500 for those aged 50 or older. In 2023, a couple where only one spouse is employed can contribute a maximum of $13,000 annually, or $15,000 if both spouses are aged 50 or above.

Contributions to each account, including Roth IRA contributions, are restricted by the individual annual IRA limits, and the IRS limits the contribution based on the couple’s income. For example, if the couple’s taxable compensation is $10,000, the maximum contribution for both spouses’ IRAs combined is $10,000. The phase-out range for married couples filing jointly is dependent on the spouse’s employment status. If the spouse making the IRA contribution is part of a workplace retirement plan, then their eligibility is affected. In 2023, the phase-out range is $116,000 – $136,000, increasing from $109,000 – $129,000 in 2022.

Awareness of these contribution limits and income restrictions is vital when strategizing your spousal IRA. Staying informed and making judicious decisions can help maximize your retirement savings and tax benefits.

Opening and Managing a Spousal IRA

Opening a spousal IRA is easy to do. It only requires some basic steps. IRS-approved institutions, such as banks, brokerage companies, credit unions, and federally insured savings and loan associations, offer spousal IRAs for couples. Keep in mind that your spouse will need to open their own IRA through a brokerage, as you cannot open an IRA for your spouse.

When opening a spousal IRA, the financial institution will require a variety of personal information, as this data must be documented to submit the appropriate tax forms in the future. Once the account is set up, contributions for the current tax year must be made by the due date of the following calendar year.

The management of a spousal IRA involves monitoring contributions, staying updated on tax regulations, and choosing suitable investment options. Regular tracking of your spousal IRA and making any necessary tweaks is key to ensuring that you’re on course to fulfill your retirement objectives.

Tax Implications of Spousal IRAs

Couples who wish to deduct spousal IRA contributions must file a joint tax return, and their IRAs are subject to the same annual contribution limits, income limits, and catch-up contribution provisions as traditional and Roth IRAs. The tax advantages of a traditional spousal IRA include the potential for a tax deduction on contributions, thereby reducing the taxable income for the year. The maximum amount that can be deducted from taxes through spousal IRA contributions is $6,000 ($7,000 for those aged 50 or above).

On the other hand, a Roth spousal IRA offers specific tax advantages, such as contributions made with after-tax funds, and tax-free withdrawals during retirement. The income limit for spousal IRA tax deductions is based on the total marital income, and the calculation may differ depending on the type of IRA, i.e., traditional or Roth. For further details, it’s recommended to consult the IRS guidelines or a tax professional.

Grasping the tax implications of spousal IRAs is key to making informed decisions about which IRA type to select and how to effectively manage contributions. Staying updated and making strategic decisions can help you optimize the tax benefits of your spousal IRA and strengthen your retirement savings.

Strategies for Optimizing Spousal IRA Contributions

Strategies for optimizing spousal IRA contributions include maximizing contributions, choosing the suitable IRA type, and assessing tax implications. With a robust spousal IRA strategy, you can enhance your retirement savings and capitalize on tax benefits, irrespective of one spouse being out of the workforce or earning minimal income.

For example, if you expect to be in a higher tax bracket during retirement, a Roth IRA might be more advantageous, while a traditional IRA may be a better fit if you anticipate being in a lower tax bracket in retirement. By managing contributions effectively and taking advantage of tax deductions or credits, couples can optimize their spousal IRA contributions to maximize tax benefits and bolster their retirement savings.

Seeking Professional Advice

Obtaining professional guidance is always beneficial in identifying the best suited IRA type and contribution approach for your unique circumstances. Financial advisors and certified financial planners are the most qualified professionals to provide consultation regarding spousal IRAs.

A professional advisor evaluates several key factors when selecting the optimal spousal IRA strategy, such as:

  • Ensuring the working spouse earns at least the amount that is contributed to all the couple’s IRAs
  • Maximizing tax benefits
  • Considering the possibility of contributing to the IRA as long as one member of the couple is earning income

By seeking professional advice, you can make informed decisions and develop a tailored strategy to optimize your spousal IRA contributions.

Real-Life Scenarios: How Spousal IRAs Benefit Couples

Spousal IRAs offer a variety of benefits for couples in different financial situations. For single-income married couples, a spousal IRA can be used to maximize tax-advantaged retirement savings, providing financial security for both spouses. Couples with unequal incomes can benefit from the spousal IRA by allowing the working spouse to contribute to the non-working spouse’s retirement account, ensuring both spouses save for retirement regardless of their income level.

High-income couples can benefit from the opportunity to double their household contributions to their IRAs, increasing their retirement savings and taking advantage of tax-advantaged retirement accounts. By carefully considering your individual financial circumstances and choosing the appropriate type of spousal IRA, you and your spouse can effectively plan for a comfortable and secure retirement.

Summary

In conclusion, spousal IRAs provide a powerful tool for married couples to maximize their retirement savings and take advantage of significant tax benefits. By understanding the differences between traditional and Roth spousal IRAs, meeting the eligibility criteria, and optimizing your contributions, you can secure your financial future together. Don’t hesitate to seek professional advice to tailor your spousal IRA strategy to your unique financial goals and circumstances, ensuring a comfortable and prosperous retirement for both you and your spouse.

Frequently Asked Questions

What are the rules for a spousal IRA?

Spousal IRAs allow for each spouse to contribute up to the annual contribution limit of $6,500 ($7,500 if age 50 or older) in 2023, and up to $7,000 ($8,000 if age 50 or older) in 2024, provided they file taxes jointly with a spouse who does have taxable income. Contributions can’t exceed the taxable compensation reported on their joint return.

Is it a good idea to have a spousal IRA?

Yes, it can be a good idea to have a spousal IRA because it provides an opportunity for couples to boost their retirement savings, and both spouses gain access to the same variety of investments.

What is the difference between IRA and spousal IRA?

A spousal IRA is not a special type of IRA, but rather a way for married couples to both take advantage of the tax benefits and savings associated with an IRA. A working spouse can contribute to a non-working or lower earning spouse’s account as long as the couple is filing taxes jointly and the working spouse earns at least as much money as the contributions.

What is a spousal IRA account?

A spousal IRA is a type of individual retirement account that allows a working spouse to contribute to their non-earning partner’s retirement savings. To qualify for this account, couples must file their taxes jointly and adhere to normal IRA contribution limits. This tax-advantaged retirement account provides an opportunity for the non-working partner to save for the future.

What are the key differences between traditional and Roth spousal IRAs?

Traditional spousal IRAs offer tax-deductible contributions, whereas Roth spousal IRAs require after-tax contributions, but provide tax-free withdrawals in retirement.

Tim Schmidt

About 

Tim Schmidt is an Entrepreneur who has covered retirement investing since 2012. He started IRA Investing to share his expertise in using his Self-Directed IRA for alternative investments. His views on retirement investing have been highlighted in USA Today, Business Insider, Tech Times, and more. He invested with Goldco.