Are you and your spouse in the process of planning your financial future? Does one of you prefer to stay at home and not work? If your answer is “Yes” to both of these questions, you must know about spousal IRA.
When both of you save for retirement, you probably look for ways to invest as much money as possible for a comfortable retired life. But since most retirement plans require you to have an income before you can contribute any money, it may seem like you are at a disadvantage if one spouse does not work.
However, you are not necessarily at a loss if any one of you chooses to take care of the home or raise children instead of working. A spousal IRA can help you save on behalf of a non-working spouse. Read on to learn about this excellent financial arrangement in detail, including what a spousal IRA is, its contribution limits, rules, benefits, and more!
What is a Spousal IRA?
Spousal IRA is essentially an exemption to the general rule that you must earn an income to contribute to an IRA. It allows a working spouse to contribute to a retirement account for their non-working spouse.
It’s an excellent choice for you if you and the one you are married to file your taxes jointly. One important thing to remember is that each IRA is set up under an individual spouse, not as a joint account.
What are Some Examples of a Spousal IRA?
A practical example of a spousal IRA will give you a better understanding of how this works.
Let us assume there is a 40-year-old couple named Chris and Jessica who opened their Roth IRA before getting married. While Jessica is a stay-at-home mom taking care of the house, Chris earns more than $100,000 yearly. They save around $14,000 in their IRAs and plan to equally split their contributions between their Roth IRA accounts, making it $7,000 each.
This is how a spousal IRA works. You can contribute about $7,000 yearly and additional catch-up contributions.
What are the Types of Spousal IRA: Traditional IRA vs. Spousal Roth IRA
Since a spousal IRA is an individual account, you and your spouse can set up either a traditional IRA, a Roth IRA, or both. Here is what you need to know about your options:
- Traditional Spousal IRA: If you plan to open a traditional IRA, there is an age limit. You or your spouse need to be below 70 ½ at the beginning of your contributing year. Moreover, the traditional IRA works on the pre-tax model.
The taxes on your contributions are not immediately deducted. According to the spousal IRA withdrawal rules, they are deducted when you withdraw money from your IRA. - Spousal Roth IRA: A Roth IRA does not have any age limits for contributions. Hence, you and your spouse can open one at any time in your lives. However, there is an income limitation. So, you cannot open this account if you earn above the set income limit.
The most significant benefit of a Roth IRA is that the income tax is deducted as soon as you contribute. So, you can withdraw the money tax-free.
What are Spousal IRA Contribution Limits for 2024?
In 2024, if you are under 50, your spousal IRA contribution can be up to $7,000, and if you are 50 or older, the limit is $8,000. So, your total contribution cannot exceed $14,000 if you are both under 50 or $16,000 if you are either 50 or older. Keep these limits in mind when planning your contributions!
For a more in-depth look, check out our blog on IRA Contribution Limits 2024. It’s time to develop your financial plan and prepare for a safe retirement.
What are the Penalties for Excessive Spousal IRA Contributions?
If you go over your spousal IRA contribution limit, don’t worry! You have the choice to fix it. The IRS allows you to withdraw any extra gifts before the tax filing deadline. However, if you do not, they will be taxed at 6% per year while in the account.
What are Spousal IRA Deduction Limits?
Contributions to a spousal Roth IRA are not tax deductible. But future withdrawals are tax-free, which is fantastic. In contrast, contributions and withdrawals from a spousal conventional IRA can be tax deductible.
However, there are several IRS limitations that you should be aware of when it comes to how much you may deduct for tax reasons with a regular IRA.
How Does a Spousal IRA Work?
There is no particular IRA type meant for spouses. A spousal IRA is your ordinary retirement account that can be used by a married couple with one non-earning member. You can utilize a Roth, traditional, or both IRAs while being subjected to the same contribution limits, catch-up provisions, and income limits.
However, remember both of you should file taxes jointly to qualify for a spousal IRA. There are tax advantages depending on which IRA you choose. Couples enjoy an additional tax break time of up to $2,000 through saver’s credit.
How to Open a Spousal IRA?
Opening a spousal IRA is easy. Every IRA broker or advisor offers IRAs and Roth IRAs for you and your spouse. They will need the account holder’s personal information like name, Social Security Number, and birthdate. After opening the account, you can immediately start funding it for your future!
What Are the Rules for a Spousal IRA?
It’s not difficult to figure out how to open a spousal IRA. Any financial advisor or brokerage firm can help you. However, like other retirement accounts, opening a spousal IRA comes with a set of rules. They are:-
- The account owner of the IRA does not change. Keep in mind that a spousal IRA is not a joint account. Each one of you needs to open your own IRA under your name. This way, asset allocations, beneficiaries, etc., belong to the IRA’s owner.
- One of the critical spousal IRA rules is that both you and your spouse should file your taxes jointly.
- The total contribution for both you and your spouse can’t exceed your joint taxable income or the annual limit set by the IRS. For instance, for the tax year 2023, a married couple filing jointly with a modified adjusted gross income (MAGI) of up to $230,000 can make the total contribution to each of their Roth IRAs.
What are the Benefits of Spousal IRAs?
Spousal IRAs have several significant advantages. If you don’t work outside the home but your spouse does, there are a few compelling reasons to establish a spousal IRA, such as:-
- Tax Advantages
Both regular and Roth IRAs offer considerable tax advantages. You can receive a tax credit each year you contribute, or you enjoy tax-free income in retirement. Sure, you could save for retirement in a taxable brokerage account. But the tax savings over the decades leading up to retirement could mean a considerable difference of hundreds of thousands of dollars. - Double Contribution
By forming and contributing to a spousal IRA, you and your spouse can effectively double your IRA contributions each year. You may now save $14,000. Previously, you could only save $7,000 (based on the 2024 contribution restrictions). This is in addition to whatever contributions the income-earning spouse may make to a job retirement plan. - Attainment of Retirement Goal
When you are not working to raise children, care for your house, or any other reason, financial goals such as retirement may take a back seat. Prioritizing retirement savings is just as critical for you — if not more so — as it is for individuals with taxable income.
Consistent contributions and time in the market are two of the most important predictors of being able to save for a comfortable retirement. Investing regularly and letting your money grow for many years gives you the best chance at reaching your retirement goals. - Advantage of Saver’s Credit
Contributing to a spousal IRA allows you to take advantage of a tax benefit known as the Saver’s Credit. The amount you may contribute is determined by your income, which can range from 0% for those with family incomes over the threshold to 50% for those with lower household incomes.
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FAQs
Why should you consider a spousal IRA?
If you are not active professionally, a spousal IRA can be an essential investment for your retirement. Women who take a break from the field to raise their kids are notably benefitted through this account. They usually maintain a lower IRA than men. But things change with the spousal IRA. It can become a perfect bridge to curb this gap.
Which states require spousal consent for IRA beneficiary designation?
In certain states, property obtained after marriage is deemed community or marital property. Therefore, the IRA owner must obtain spousal approval to choose someone other than their spouse as the IRA beneficiary. These states include:-
- Arizona
- Alaska
- Texas
- Nevada
- Louisiana
- Tennessee
- New Mexico
- Wisconsin
- California
- Idaho
- Washington
- South Dakota
It is usually a good idea to consult with a tax professional in your state when setting beneficiary designations.
Do spousal IRA contributions have to be in a separate account from a regular contribution?
Nope, you don’t need to keep spousal IRA contributions separate from regular ones. You can make both types of contributions to the same traditional or Roth IRA for the owner.
Can I contribute to my spouse’s IRA if they do not work?
Sure! Even if your spouse is unemployed, you can still contribute to their IRA. However, spouses who wish to donate to their partner’s IRA but are not employed must follow certain income restrictions.
Is a spousal IRA the same as a traditional IRA?
Sometimes spousal IRAs occur when one working spouse contributes to the IRA of their non-working spouse. When establishing a spousal IRA, the couple must first decide whether to open a standard IRA or a Roth IRA.
Who exactly owns the investments in a spousal IRA?
A spousal IRA is established by a working spouse for their non-working spouse. When an IRA is created, it is in the name of the non-working spouse, not the person who made the contributions.
When it comes to divorce, distributing assets might be complex. But the usual rule is that the IRA belongs to the person whose name appears on the account, not the person who funded it.
Is a spousal IRA a good idea?
Absolutely! Financial advisors frequently promote spousal IRAs to assist married couples with different earnings to maximize their tax benefits. If one spouse is not usually qualified to contribute to an IRA, utilizing the other spouse’s income might be an excellent option to avoid or defer retirement taxes.
What are the regulations for converting a spousal IRA to a Roth IRA?
Traditional IRAs, including spousal and inherited IRAs, can be converted to Roth IRAs. The hitch is that when you execute a Roth conversion, all of the money is transferred from a pre-tax conventional IRA to a post-tax Roth IRA, which can trigger taxes.
Some people believe that the benefits of long-term, tax-free growth justify coping with the present tax penalties. Others may decide to retain the IRA as is to avoid the tax obligation. What you decide relies on your financial condition and future ambitions.
How do RMDs impact spousal IRAs?
So, when it comes to spousal IRAs and Required Minimum Distributions (RMDs), the deal is this: the RMDs for spousal IRAs are pretty much the same as for a regular IRA. Since it’s considered the spouse’s IRA, the RMDs will be based on the age of the spouse.
However, Roth IRAs don’t have RMDs unless they are inherited. This might come into play if a spouse inherits their partner’s IRA after they pass away, but it doesn’t affect a spousal Roth IRA.
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