If you and your spouse both have access to an employer-sponsored retirement plan, like a 401(k), then saving for retirement is as easy as enrolling and specifying the amount to be deducted from your paycheck.
But for many couples, it's more complicated. One spouse may leave full-time work for a period of time to care for children or parents. Or you might start a new business that doesn’t have income in the beginning.
Lack of an income doesn’t have to mean you're shut out from saving in a tax-advantaged retirement account. The IRS has an exception to the rule that says you must have earned income to make an IRA contribution. It’s called a Spousal IRA.
It helps the spouse with no income to continue to make regular contributions to an IRA, and stay on track for tax-free investment growth. If you set up a Traditional IRA, the contribution may be tax-deductible and can lower your tax burden.
Non-Working Spouse Using a Spousal IRA
The spousal IRA can be a Traditional or a Roth IRA, and taxes must be filed as married filing joint. The maximum you can contribute annually is $6,000 (for 2021 and 2022), with an additional $1,000 catch-up for those age 50 and above. The working spouse must have earned income (a job) for at least the amount contributed for both spouses.
If you set up a Traditional IRA and plan to take a deduction, there are some income limits to be aware of. The full amount is deductible if the working spouse is not covered by an employer’s retirement plan.
The deduction phases out over a range of income when the working spouse is covered by an employer sponsored plan. For 2021, if income is $105,000 or less, the full amount is deductible. A partial deduction may be taken if income is more than $105,000 but less than $125,000 (the phase-out range). At $125,000+ the deduction is fully phased-out.
The income levels have been adjusted upwards for 2022. The full amount is deductible if income is $109,000 or less. A partial amount may be deducted if income is more than $109,000 but less than $129,000. At $129,000+ none of the contribution is deductible.
How Withdrawals and Distributions Work
The spousal IRA follows the same withdrawal rules as regular IRAs – in general, you need to be age 59 ½ to take money out, or you’ll get hit with the 10% early withdrawal penalty. And required minimum distributions (RMDs) will also need to be taken out of the account beginning at age 72 for Traditional IRAs (not Roth IRAs).
If part of your retirement planning is to convert Traditional IRA funds to a Roth IRA, you’ll need to do careful tax planning. Taxes are due on the amount of the conversion, potentially creating a significant tax burden in the year(s) of the conversion.
Roth conversions can reduce and even eliminate RMDs, keep more money invested, and simplify estate planning.
Securing a Longer Retirement
Contributing to a spousal IRA can add up considerably if done consistently, and will increase your total amount of retirement savings. Depending on income levels, you may get a tax deduction. But just as important, it’s a great way to protect a spouse who decides to leave the workforce to care for children, a mom or dad, or start a business.
A spousal IRA gives you another way to save and can help lower taxes during working years. You'll need to decide on if it's beneficial to convert to a Roth IRA, and tax planning across all retirement accounts will be necessary.
John Piershale, CFP®, AEP®
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