Spousal ira

What Is Spousal IRA?

A spousal IRA is a type of Individual Retirement Account (IRA) that allows a working spouse to contribute to an IRA on behalf of a non-working or lower-earning spouse. This arrangement falls under the broader category of Retirement Planning, enabling married couples to maximize their Retirement Savings even if one spouse has little or no Earned Income. Functionally, a spousal IRA operates like a traditional IRA or a Roth IRA, adhering to the same Contribution Limits and rules, with the key distinction being that the contributions are based on the combined income of the couple rather than the individual income of the account holder. The account itself is owned by the non-working spouse.

History and Origin

The concept of the spousal IRA emerged from legislative efforts to address disparities in retirement savings opportunities for couples where one spouse did not work outside the home. Prior to its formal introduction, individuals typically needed their own earned income to contribute to an IRA. The Employee Retirement Income Security Act of 1974 (ERISA) established Individual Retirement Arrangements (IRAs) to encourage private retirement savings. Initially, a homemaker with no outside income could not contribute to an IRA²².

An amendment two years later allowed homemakers to save a nominal amount, but it was significantly less than what a working spouse could contribute²¹. This imbalance spurred advocacy for greater equality in retirement savings. A significant turning point came with the passage of the Tax Reform Act of 1986, which introduced provisions for the spousal IRA, allowing a non-working spouse to contribute to a traditional IRA using the working spouse's income²⁰. Further legislative changes, particularly the Small Business Job Protection Act of 1996, increased the spousal IRA contribution limit to match that of the working spouse's IRA, thanks to the efforts of senators like Kay Bailey Hutchison, after whom it is sometimes informally named the "Kay Bailey Hutchison Spousal IRA"¹⁹,¹⁸. This evolution aimed to provide dual-income earning couples and single-income households with more equitable opportunities to build a secure financial future.

Key Takeaways

• A spousal IRA enables a working spouse to contribute to an IRA for a spouse with little or no earned income.
• The account is individually owned by the non-working spouse, not jointly held.
• Spousal IRAs can be either traditional or Roth IRAs and follow the same rules as these account types, including Tax-Deferred Growth or tax-free withdrawals in retirement.
• To be eligible, the couple must file a Joint Tax Return.
• Total contributions for both IRAs cannot exceed the combined taxable earned income of the couple.

Interpreting the Spousal IRA

Understanding the spousal IRA centers on its unique eligibility for contributions. While most IRAs require the account holder to have taxable earned income, a spousal IRA bypasses this rule by allowing contributions based on the working spouse's income¹⁷. This means that even if a Non-Working Spouse has no personal earnings, they can still establish and fund their own retirement account.

The interpretation also involves recognizing that a spousal IRA is not a distinct type of IRA, but rather a standard traditional or Roth IRA that is funded under specific IRS provisions for married couples. This means the rules regarding Withdrawals, required minimum distributions (RMDs), and investment options are identical to those of any other traditional or Roth IRA. The primary benefit lies in its ability to facilitate broader Retirement Planning for couples, ensuring both individuals can accumulate independent retirement assets.

Hypothetical Example

Consider John and Sarah, a married couple filing jointly. John works and has an annual Earned Income of $70,000, while Sarah is a stay-at-home parent with no earned income of her own. For 2025, the IRA contribution limit for individuals under age 50 is $7,000.

Without a spousal IRA provision, Sarah would be unable to contribute to her own IRA because she lacks earned income. However, because John has sufficient earned income and they file a joint tax return, he can contribute the maximum of $7,000 to his own Traditional IRA and an additional $7,000 to a separate Traditional IRA opened in Sarah's name.

This means that as a couple, they are able to contribute a total of $14,000 towards their Retirement Savings in tax-advantaged accounts for that year. Both IRAs will grow with Tax-Deferred Growth, helping them build a larger nest egg for their future.

Practical Applications

The spousal IRA serves as a crucial tool in Financial Planning for married couples, particularly those with a single income or a significant income disparity. One of its primary applications is enabling a non-working spouse to build their own independent retirement fund. This is vital for long-term financial security, as it provides the non-working spouse with personal assets that are not solely dependent on the working spouse's accounts.

For instance, in the event of divorce or the death of the working spouse, the non-working spouse will have their own established retirement savings. This allows for a more robust Estate Planning strategy for the couple. Furthermore, contributing to a spousal IRA can effectively double a couple's ability to save in tax-advantaged accounts each year, significantly boosting their combined Retirement Savings potential¹⁶. It also provides opportunities for potential tax deductions, depending on income levels and participation in workplace retirement plans, making it an attractive option for optimizing a household's overall tax strategy¹⁵. According to the IRS, total combined contributions for spouses cannot exceed the taxable compensation reported on their joint return¹⁴.

Limitations and Criticisms

While beneficial, spousal IRAs do come with certain limitations and considerations. The primary limitation is that the total combined contributions for both spouses cannot exceed the couple's total taxable Earned Income for the year¹³. This means if the working spouse's income is relatively low, the couple might not be able to contribute the maximum amount to both IRAs.

Additionally, like all IRAs, spousal IRAs are subject to annual Contribution Limits set by the IRS, which are generally lower than those for employer-sponsored plans like 401(k)s¹². This means that while a spousal IRA is an excellent tool, it may not be sufficient on its own for aggressive retirement saving, especially for high-income earners. The deductibility of traditional IRA contributions and eligibility for Roth IRA contributions can also be limited by a couple's Adjusted Gross Income (AGI)¹¹. If the working spouse is covered by a workplace retirement plan, the ability to deduct contributions to a traditional spousal IRA may be phased out at higher income levels. Similarly, Roth spousal IRA contributions have income phase-out ranges¹⁰. Therefore, couples must consider their specific income and existing retirement plans when deciding on this strategy.

Spousal IRA vs. Traditional IRA

The distinction between a spousal IRA and a Traditional IRA often causes confusion because, fundamentally, a spousal IRA is a traditional (or Roth) IRA. The term "spousal IRA" refers not to a distinct account type, but rather to the IRS rule that allows a contribution to be made to an IRA held by a Non-Working Spouse, drawing from the income of the working spouse.

The key difference lies in the source of the eligible income for the contribution. For a traditional IRA that is not a spousal IRA, the account holder must have their own earned income. For a spousal IRA, the eligibility for the non-working spouse's contribution is derived from the working spouse's income, provided they file a Joint Tax Return. Both types of accounts aim to facilitate Retirement Savings with tax advantages.

FAQs

Can I contribute to a spousal IRA if my spouse also contributes to their own 401(k)?

Yes, a working spouse can contribute to their own 401(k) and simultaneously contribute to a spousal IRA for their non-working or lower-earning spouse, provided the couple meets the income and filing requirements⁹,⁸. The spousal IRA is a separate account and does not affect the working spouse's 401(k) contribution limits.

What are the income limits for contributing to a spousal IRA?

There are no specific income limits for contributing to a traditional spousal IRA in terms of eligibility to contribute, as long as the couple's combined Earned Income covers the contributions⁷. However, there are income limitations that affect the deductibility of contributions to a traditional spousal IRA if the working spouse is covered by a workplace retirement plan. For Roth spousal IRAs, there are Adjusted Gross Income (AGI) phase-out ranges that can limit or eliminate the ability to contribute the full amount⁶.

Is a spousal IRA a joint account?

No, a spousal IRA is not a joint account. While the contributions are based on the couple's combined income, the spousal IRA is an Individual Retirement Account (IRA) legally owned by the non-working or lower-earning spouse⁵. This means the assets in the account belong solely to that individual.

What happens to a spousal IRA if the couple divorces?

In the event of a divorce, the assets in a spousal IRA, like other retirement accounts, are typically considered marital property and are subject to division as part of the divorce settlement⁴. Since the account is legally owned by the non-working spouse, they would generally retain ownership of their spousal IRA, but its value may be taken into account during asset division.

Are there any age limits for contributing to a spousal IRA?

There are no age limits for contributing to a traditional or Roth spousal IRA as long as the working spouse has sufficient Earned Income and the couple files a Joint Tax Return³,². However, there are age restrictions on Withdrawals without penalty, typically after age 59½, and Required Minimum Distributions (RMDs) generally apply once the account holder reaches a certain age, currently 73.¹