Did you know that you can set aside thousands of dollars for retirement each year through a spouse IRA, even if your spouse doesn't work? A "spouse IRA" is a fantastic label, but if you're familiar with individual retirement accounts, you're probably familiar with the concept.
In this article, I'll explain what a spousal IRA is, the rules that apply to spousal IRAs (and IRAs in general), and where you should consider opening a spousal IRA.
A spouse IRA allows a working husband or wife to contribute to a tax-advantaged retirement account registered in the name of a non-working (or low-income) spouse.
Spousal IRAs allow you to set aside up to $12,000 a year in IRAs as a couple, even if one of you doesn't work. (This number adds up to a total of $14,000, or $7,000 each for people age 50 and older.)
Joint IRAs do not exist. The name "Individual Retirement Account" is quite literal. Therefore, the working spouse must contribute to the IRA that is in the name of the non-working spouse.
The term "joint IRA" is not the name of a product. It simply describes the legal act of contributing to your spouse's regular IRA. The non-working spouse can open an IRA before marriage, before becoming unemployed, or after becoming unemployed.
Although Spouse A is the funder of the IRA on file for Spouse B, technically Spouse B has full control of the account. This means investing the funds, naming a beneficiary, and deciding whether to sell or withdraw.
What are the rules and requirements of the spouse's IRA?
Do you want to invest with a spouse IRA? There is one main rule. You must be married and file your taxes together. In addition to this distinction, the rules that apply to your "regular" IRA also apply to a spouse's IRA.
Here are some of these standards and requirements:
- Your combined MAGI (Modified Adjusted Gross Income) must equal or exceed the amount of money you contribute to an IRA. In other words, if you earn a total of $10,000 annually, you can't contribute more than $10,000 in total to your two IRAs.
- Required minimum distributions (RMDs) and income limits for deductible contributions still apply to traditional IRAs.
- Income limits for contributions still apply to Roth IRAs. I will detail the income-based rules for all IRAs shortly.
- If you haven't contributed more to your husband's or wife's account in a given year, you have until mid-April of the following year to continue contributing, just like you do with your own IRA.
- If you're married and file your taxes together with an adjusted gross income of less than $68,000 in 2022, you'll be entitled to a savings tax credit of up to $2,000.
Roth and traditional IRA income limits
A Roth IRA is the best option for most people. But if you make a lot of money, you won't be able to contribute to a Roth in 2022. Here's the eligibility table for married filers filing together:
- Combined Taxable Income Contribution Limit
- Less than $204,000 $6,000 for each spouse ($7,000 for age 50+)
- Exemption from contributions from $204,000 to $214,000 (threshold changes based on income)
- Over $214,000 $0
- Contributions to a traditional 401(k) or IRA are generally tax deductible.
However, traditional IRA contributions are sometimes not tax deductible. Let's say you're married filing jointly and your IRA-contributing spouse has access to a retirement plan at work.
Contribution limits
- Contributions less than $109,000 are fully deductible $6,000 per person ($7,000 over 50 years)
- $109,000 to $129,000 Partially deductible (eliminated based on specific income) $6,000 per person ($7,000 for age 50+)
- $129,001 or more No deductibles $6,000 per person ($7,000 for age 50+)
Now let's say the person contributing to the spouse's IRA doesn't have access to a retirement plan at work, but your spouse does. In this case, the IRS sets the income threshold somewhat higher before removing deductible contributions:
Contribution limits
- Contributions up to $204,000 are fully deductible at $6,000 per person ($7,000 for those 50 and older)
- $204,000 to $214,000 Partially deductible (phasing out based on specific income) $6,000 per person ($7,000 for people age 50 and older)
- $214,001 or more No deductibles $6,000 per person ($7,000 for age 50+)
How much money can a spouse IRA save me for retirement?
Think about how much money you spend each year now. This figure is likely to increase in the future due to inflation, rising medical costs, taxes, and other factors.
Contributing an extra $6,000 each year to a non-working spouse's IRA, if you can, doesn't sound like much in this context. But contributing $500 a month for 30 years fetches almost $420,000 with a conservative 5% rate of return.
Once you max out your own IRA, you may have enough money to contribute $100 a month. But let's say you do it every month from 25 to 65. You'll still set aside over $150,000 with the same 5% ROI.
Setting aside a little extra money for retirement through a spouse IRA can create a significant amount of money for you and your marriage at the end of your business days.
Where and how to open a spouse IRA?
A joint IRA is somewhat inappropriate. It is not a separate product. It's just a regular individual retirement account that you can fund if it's in your spouse's name and you file your taxes together.
You can manage your own investment portfolio in your Roth IRA or use a robotic advisor. For that, Charles Schwab, Fidelity, and Vanguard are your top three favorites for just about every investment.
Think about how you invest the money in your IRA before you open a new account. This way you can compare the companies you are considering more critically.
A robotic advisor is a good option if you prefer to outsource your investment. Some of the best robotics consultants charge 0.25% or less annually in administration fees.
Roth vs. Traditional IRAs.
Because Roth contributions involve after-tax dollars, you can withdraw your contributions, and your income from these contributions, tax-free in retirement.
Your Roth account must be at least five years old before you can benefit from tax-free withdrawals.
Taxes will increase in the future, perhaps even significantly. So unless you're in one of the highest tax brackets today, paying your taxes now and enjoying tax-free withdrawals in retirement can be a big financial gain.
conclusion
If you or your spouse is the primary provider, it may make sense for both of you to use a spouse IRA. This is especially a good option if the primary earning spouse lacks a good 401(k) option at work or still has more money to invest after maxing out their 401(k) contributions.