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  • Writer's pictureNate Baim, MBA, CFP®

The IRA for the Spouse in Flux

The IRA For the Spouse in Flux. Man climbing mountain.

Having access to employer-sponsored retirement plans (such as 401(k)s or 403(b)s) can be super convenient. With these retirement savings plans, it is easy to specify the contribution amount you wish to deduct from each of your paychecks. But for many early and mid-career couples, it can be a little more complicated when one spouse loses access to an employer retirement plan. One spouse may leave full-time work to care for children, go back to school, or help aging parents. A spouse may also have started a new business that doesn't generate income yet.

Generally, for an individual to contribute to an IRA, that individual must have earned income to make IRA contributions. But, if you are married and your household has earned income, a lack of a spousal income doesn't necessarily prohibit you from tax-advantaged retirement savings. A Spousal IRA allows the spouse who doesn't have earned income to have an IRA still receiving contributions.

A spousal IRA allows a working spouse to contribute to an individual retirement account in the name of a non-working spouse with little or no income. Spousal IRAs are an exception to the provision that an individual must have earned income to contribute to an IRA. But some rules still apply.

Using a Spousal IRA can be huge. If both spouses can contribute their annual max, you could save potentially $12,000 yearly ($14,000 for those over age 50). Regular contributions can help keep your retirement goal on track and provide access to tax-free investment growth. If you set up a Traditional IRA, the contribution may be tax-deductible and can lower your tax bill in the year you contribute. And if you contribute to a Roth IRA, you will avoid the required minimum distributions in retirement.

Are you trying to figure out where best to save your hard-earned money? Download our 18-point checklist, which outlines the accounts you should consider if you want to save more.

Spousal IRA Rules

The spousal IRA is a regular IRA account that is either a Traditional IRA or a Roth IRA. It is an individual account held in the name of the spouse. There are no joint accounts with IRAs. To be able to open one, your taxes must be filed as "married filing jointly." The maximum contribution amount is the same – $6,000, with an additional $1,000 catch-up for those age 50 and above. The household must have enough earned income to cover the amount of the contributions made to all IRAs during that year.

Spousal Traditional IRA

If you set up a Traditional IRA and plan to take a deduction, you still need to be careful of the income phase-outs and limits. The contributions are fully deductible if neither spouse is not covered by an employer's retirement plan.

Traditional IRA Characteristics

However, the rules get complex when only one spouse is covered by an employer-sponsored retirement. When only one spouse actively participates in a qualified workplace retirement plan, the amount you may deduct from your income is dependent on your income and which spouse is covered by a plan. Here are the rules:

  • If the IRA contribution is made for the low/no income spouse and they are an active participant in a workplace retirement plan, the phase-out range is $109,000 to $129,000 for 2022. A partial deduction is allowed in the phase-out. Beyond $129,000, you are unable to receive a deduction.

  • If the IRA contribution is made for the low/no income spouse and they are not an active participant in a workplace retirement plan, the phase-out range is $204,000 to $214,000 for 2022. A partial deduction is allowed in the phase-out. Beyond $214,000, you are unable to receive a deduction.

The income phase-out levels are annually reviewed and updated based on inflation.

Spousal Roth IRA

Spousal Roth IRA contribution rules are simpler to navigate. Roth IRA contributions are not dependent on if you are actively participating in a qualified retirement plan. For 2022, the total $6,000 (or $7,000 with catch-up) contribution is allowed if your household modified adjusted income (MAGI) is $204,000 or less. You can make partial Roth contributions if your family MAGI is between $204,000 and $214,000. If your income exceeds $214,000, your no longer qualify for Roth IRAs. If your income exceeds $214,000, you may want to consider investigating a Backdoor Roth IRA.

Planning for Retirement Withdrawals

The spousal IRA follows the same withdrawal rules – you must be 59 ½ to take money out, or you'll get hit with the 10% early withdrawal penalty. And required minimum distributions will also need to be taken out of a Traditional IRA beginning at age 72. Roth IRAs are not subject to RMDs.

You'll need to plan carefully to see if converting Traditional IRAs to Roth IRAs makes sense. Significant changes in your household income may present opportunities to manage your future taxes better. However, potential tax savings in the future does mean paying taxes today when dealing with Roth conversions. Taxes will be due on the amount converted, potentially creating a significant tax burden in the year(s) of the conversion. But converting to a Roth has advantages. The Roth conversion will eliminate RMDs in the future, allow the account to remain invested, and simplify estate planning.

Building Retirement Confidence

Contributing to a spousal IRA can add up considerably if done consistently, increasing the total retirement savings. It may also provide an additional tax deduction depending on income levels and whether you contribute to a Roth or Traditional IRA. A Spousal IRA is a great way to increase your retirement confidence if one partner leaves the workforce to care for children or other family members, start a business, or go back to school. Continuing to contribute to an IRA can provide additional retirement security.

The Takeaway

A spousal IRA expands the retirement savings toolkit and can help you better manage your taxes. You will need to review your retirement goals and decide whether contributing to a Roth IRA is appropriate. Tax planning across all retirement accounts will be necessary.

Working with a trusted financial planner can reduce your stress and help you map out the best course of action for your situation. Are you trying to figure out what savings strategy is best for your child's education? At Pursuit Planning and Investments, LLC, I help you think through your options. I help you make the best decisions for yourself, your family, and your money. Feel free to place a commitment-free 30-minute meeting on my calendar. We can discuss your goals and begin best optimizing your financial plan in that meeting.

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