What is a spousal IRA and how does it work?

What is a spousal IRA?

A spousal IRA is a type of individual retirement account (IRA) to which a working spouse can contribute on behalf of the non-working spouse. Typically, people must earn income to contribute to a traditional individual retirement account (IRA) or a Roth IRA. However, if you’re married, you can use a spousal Roth IRA to grow your retirement savings, even if only one spouse works for pay.

An IRA is an excellent tool when it comes to saving for retirement. These accounts were introduced in the mid-1970s as a way to help workers save for retirement and reduce their taxable income. It’s no surprise, then, that you must have income from a job to contribute to an IRA and enjoy the tax benefit. According to Internal Revenue Service (IRS) rules, you need to have “taxable compensation” to contribute to a traditional or Roth IRA.

Despite the income requirement, spouses can have access to a retirement account even if they do not work for pay. Discover the tax and investment benefits of a spousal IRA.

Key takeaways

A spousal IRA is a type of retirement savings that allows a working spouse to contribute to an individual retirement account (IRA) in the name of a non-working spouse.
Generally, a person must have earned income, but the spousal IRA is an exception, allowing a spouse with earned income to contribute on behalf of a spouse who does not work for pay.
A working spouse can contribute to both IRAs, as long as they have enough earned income to cover both contributions.
Aside from how they are funded, spousal IRAs typically have the same rules as “regular” IRAs.
The spouse whose name is on the IRA is the legal owner of the funds in the account, even if they were not the person who funded the account. The spousal exception defines how contributions can be made.

Understanding a Spousal IRA

A spousal IRA is a type of retirement savings strategy that allows a working spouse to contribute to a GONNA in the name of a non-working spouse. Generally, a person must have earned income to contribute to an IRA, but the spousal IRA is an exception since the non-working spouse may have little or no income.

Contributing to a spousal IRA can provide significant retirement savings for non-working spouses. These non-working spouses may not have access to a retirement plan through their own employer (especially if they do not have an employer). Therefore, the intention behind spousal IRAs is to continue to provide retirement savings opportunities to those who otherwise would not have opportunities.

Additionally, contributions to a traditional IRA may be tax deductible, while contributions to a Roth IRA are made with after-tax dollars but can provide tax-free withdrawals in retirement. Therefore, a spousal IRA (whether traditional or Roth) provides taxpayers with long-term tax benefits that impact current or future taxable income.

What counts as taxable compensation?

There are two ways to earn taxable compensation: work for someone who pays you or own a business (or farm). Taxable compensation includes the following:

Salaries and wages
Tips and bonuses
Commissions
Taxable alimony and separate support
Self-employment income
Non-taxable combat pay

The following types of income do not count as taxable compensation:

Profits and benefits of property.
Interest and dividends on investments.
Income from pensions or annuities
Deferred compensation
Income from certain associations
Any amount you exclude from your income

Your earned income must equal or exceed your IRA contribution. For 2024, you can contribute up to $7,000 or $8,000 if you are 50 or older. Therefore, to make the full contribution, you need at least the above amounts. If you earn less, you can contribute up to the amount you earned without the spousal IRA exception.

If you contribute more than you are allowed, you will owe a 6% penalty each year until you correct the error.

Spousal IRA Exception

Can contribute to a spousal IRA on behalf of a spouse who has no earned income. To do this, you must have sufficient earned income to cover both contributions. To fully contribute to both IRAs in 2024, your earned income would have to be at least $14,000, or $16,000 if you are both age 50 or older.

Keep in mind that IRAs are individual accounts (so the individual in IRA). As such, a spousal IRA is not a joint account. Rather, each has their own IRA account, but only one spouse funds both. Regardless of who contributes to the spousal IRA, the IRA belongs to the person whose name is on the account.

You must be married and file jointly to open a spousal IRA.

To take advantage of a spousal IRA, you must be married and your tax return statusmust be married filing jointly. You cannot make a spousal contribution to an IRA if submit separately.

Benefits of a Spousal IRA

A spousal IRA is a great way for a spouse who is not working for a salary to save for retirement. Without the spousal IRA exception, spouses without earned income may have trouble finding a tax-advantaged way to save for retirement.

If one spouse has already exhausted their own IRA contributions, it can be a great opportunity for couples to enhance their tax-advantaged retirement planning.

Your spouse can name you as the beneficiary of the spousal IRA. But once you start contributing to the account, the money belongs to your spouse. This becomes important if you separate or divorce in the future.

A spousal IRA remains intact even if the unearned spouse begins receiving work pay. In this case, they can still contribute to the IRA, according to the usual IRA rules.

Is a spousal IRA a traditional or Roth IRA?

A spousal IRA is an ordinary IRA created in the name of the spouse. You can set it as either a traditional IRA or a Roth. The biggest difference between the two IRAs is when you get the tax exemption. With a traditional IRA, you deduct your contributions now and pay taxes later when you take distributions.

With Roth IRAs, there is no down payment tax deductionbut your contributions and profits They grow tax-free and qualified distributions are tax-free as well. There are other differences too. Below is a quick summary.

Roth and traditional IRA: key differences
Feature	Roth IRA	Traditional IRAs
Contribution limits for 2024	2024: $7,000 or $8,000 if you are 50 or older	2024: $7,000 or $8,000 if you are 50 or older
Income limits for 2024	People with high incomes may not be able to make contributions	High-income earners may not be able to deduct contributions
Tax Treatment	There is no tax reduction for contributions; Withdrawals are tax-free in retirement	Tax deduction for contributions; withdrawals taxed as ordinary income
Required Minimum Distributions (RMDs)	No RMD for the life of the account holder; Beneficiaries can spread distributions over many years.	Distributions must begin at age 73 beginning in 2023. Beneficiaries pay taxes on inherited IRAs

Generally, a Roth IRA is a better choice if you expect to be better off. tax category retired than the one he has now. If you do, it’s better to pay your taxes now, at a lower rate, and enjoy tax-free withdrawals later.

They’re also a good idea if you don’t think you’ll need to withdraw money from your IRA. There is no minimum distributions required during your lifetime, so you can leave the entire account to your beneficiaries.

Spousal IRAs and Divorce

the treatment of Spousal IRA During a Divorce It may vary depending on the laws of the state where the divorce occurs. The treatment of marital IRAs may also be subject to the specific terms of the divorce agreement.

Generally, marital IRAs are considered marital property and may be subject to division during a divorce. Although IRAs are owned by each individual when the couple is together, the value of the marital IRA can be divided between the spouses as part of the property settlement agreement. Again, this may be subject to specific criteria for each divorce.

If the spousal IRA is a traditional IRA, any withdrawals made during the divorce process will be subject to taxes and penalties. This is especially important to keep in mind in situations where the couple may need to withdraw retirement funds to pay for legal fees associated with the divorce.

If you specified in your agreement that your IRA split is a rollover due to your divorce, no tax will be assessed. This means that if you are giving half of your IRA to your spouse, he or she will have to pay the tax on any distributions withdraw from the account after receiving the funds. You won’t have to pay taxes on the assets if you properly label your split, but you’ll both have to pay taxes and a early withdrawal penalty if not done correctly.

What is the income limit for a spousal IRA?

The upper income limit for a spousal Roth or traditional IRA is $240,000 for 2024.

Do I have to file a joint tax return to contribute to a spousal IRA?

Yes. A open a spousal IRAYou must file your taxes as married and file a joint return. This is necessary because your tax return is used to verify that your income level is appropriate for these tax-advantaged investment tools.

Does the money in my spousal IRA belong to me or my partner?

Once money has been contributed to an IRA, it belongs to the owner whose name is on the account. In other words, the funds belong to the non-working spouse, even in the event of divorce or separation. However, all combined and individual assets may be subject to the separation agreement. Depending on that agreement and local laws, assets within a marital IRA may be divided or shared between spouses.

The conclusion

A spousal Roth IRA can be a great way to grow your retirement savings with tax advantages if your household has a single income. You’ll pay taxes now and withdraw funds tax-free later when you’re in a higher tax bracket.

Additionally, it can be a way to provide some financial security to a spouse who works a lot but may not receive financial compensation for it.

Remember: a spousal IRA can be structured like a traditional or Roth IRA. If you’re not sure which type of IRA would best benefit you and your spouse, talk to a trusted financial advisor.