Retirement accounts offer excellent tax perks, like deferring or eliminating income taxes. However, the downside is that following IRS (Internal Revenue Service) regulations can be challenging. Knowing the rules can help you avoid costly mistakes and save more for retirement.
A great example is an often underutilized retirement strategy called a spousal IRA. This post will explain what a spousal IRA is, its benefits, and who can use one to invest more for retirement.
Who qualifies for an IRA?
To understand the benefits of a spousal IRA (individual retirement account), it helps to review who qualifies for one in the first place. IRAs are typically available to anyone with earned income, regardless of age. But I’ll explain how a spousal IRA is a terrific exception to the income rule!
With a traditional IRA, contributions are pre-tax, reducing your taxable income in the same year. You only pay income tax on contributions or investment earnings once you make withdrawals in retirement. The IRS requires you to take taxable distributions starting at age 72 or 73.
With a Roth IRA, contributions are after-tax, but you pay no additional income tax on them or your investment earnings when you make withdrawals in retirement. There are no required minimum distributions from Roth accounts.
To contribute to either type of IRA, you generally must have taxable compensation, like a salary, wages, commissions, tips, bonuses, or net income from self-employment. Other types of income, including alimony, investment earnings, and payments from a pension or annuity, don’t count as compensation when qualifying for IRA contributions.
However, there is an annual income threshold you can’t exceed to qualify for a Roth IRA. For 2024, single taxpayers with modified adjusted gross income (MAGI) below $161,000 qualify to contribute. And if you’re married and file joint taxes, your household MAGI can’t exceed $240,000 to make Roth IRA contributions.
Another important rule is that when your spouse participates in a workplace retirement plan, like a 401(k) or 403(b), your ability to deduct traditional IRA contributions may be reduced or eliminated based on their income. But there’s no conflict with maxing out a workplace retirement plan and a Roth IRA in the same year.
Laura covers three legit ways to have a Roth IRA–even if you’re technically ineligible because you earn too much–and why their tax-free benefits are so powerful for young owners and retirees. Listen to that episode in the player below:
How much can you contribute to an IRA?
For 2024, you can contribute an amount to a traditional or Roth IRA equal to your qualified compensation, up to a maximum of $7,000 or $8,000 if you’re over 50.
For example, if you’re a student who earns $2,000 working a summer job, you could contribute $2,000 to a traditional or Roth IRA. But if you’re 40 and earn $100,000, you can contribute at most $7,000 to either type of IRA.
Withdrawals of untaxed funds from a retirement account before age 59.5 are subject to income tax plus an additional 10% early withdrawal penalty. Therefore, you shouldn’t put money in a retirement account that you might need to spend. It’s best to avoid tapping a retirement account early so it can reach its full growth potential.
What is a spousal IRA?
So, what would happen if you lost your job or quit working to be a stay-at-home parent or caretaker? As I mentioned, you typically can only contribute to an IRA with your own qualifying income.
Here’s the exception: If you’re married and file a joint tax return, you can take advantage of a spousal IRA if one of you has qualifying income.
A spousal IRA isn’t a different type of IRA but a rule that allows a married breadwinner to fund their spouse’s IRA even if the spouse has little or no income. It’s a workaround that enables a working spouse to contribute to an IRA owned by their nonworking spouse.
But the rule doesn’t apply if you’re married and file taxes separately. Also, note that an IRA can never be owned jointly, even if you’re married.
Laura explains the mega backdoor Roth conversion, who can use it, and more Roth strategies for boosting your retirement savings. Listen to that episode in the player below.
Spousal IRA example for a married couple
Let’s say Dave and Terry are newlyweds in their 30s who decide to start a family. If one wants to take extended time off from work and they file a joint tax return, each can fully fund a traditional or Roth IRA.
As I mentioned, for 2024, a nonworking spouse under 50 can have IRA contributions up to $7,000. Therefore, Dave and Terry’s total combined IRA contributions could be $14,000.
However, if one spouse were over 50, the couple could save $15,000 ($7,000 + $8,000). Or, if a couple is over 50, they could contribute up to $16,000 ($8,000 + $8,000), even if one has no income. Remember that it wouldn’t be possible to fund an IRA while you’re unemployed without using the spousal IRA strategy.
Note that when you’re eligible for an IRA contribution on your own or due to a spouse’s income, the funds can come from any source, such as household income or a cash gift.
For example, if you have a teenage child who works part-time and earns $2,000 but spends all of it, you or someone else (like a grandparent) could contribute $2,000 to the teen’s IRA on their behalf.
So, don’t miss the opportunity to fund an IRA for a child or yourself if you’re married and not working. Once you have a spousal IRA, you own the account, no matter who made its contributions.
Laura answers a listener’s question about the Roth IRA rules for his minor kids and how to pay them and correctly report the income for working in his business. Listen in the player below.
How to open a spousal IRA
No matter why you may be out of the workforce, don’t let essential goals, like retirement, take a back seat. It’s just as important to prioritize your financial future as it is for someone with earned income.
Regularly investing in a tax-advantaged retirement account for long-term growth gives you the best opportunity to reach your retirement goals. For IRAs, you have until your tax filing deadline to make contributions for the previous tax year. So, if you want to max out an IRA for 2024, you have until April 15, 2025.
If you already have an IRA, you can use it for spousal IRA contributions if you’re eligible.
You can also open a new IRA with any financial institution or investing firm. Then, you choose how to invest the contributions based on your risk tolerance and goals.
Betterment is a terrific investing platform I use and recommend because it makes it easy to set and automate goals.
While you might consider your spouse’s retirement account a joint asset, they are always individual accounts. Therefore, building wealth for your future with a retirement account in your name is critical.