Spousal IRAs: A Quick Guide

A “spousal” Individual Retirement Account (IRA) allows a spouse with little or no compensation from employment to open a separate IRA and complete contributions based on the other spouse’s income. This offers spouses filing joint tax returns the opportunity to put aside more tax-advantaged savings than funding only one IRA. I’ve put together this quick guide to help you evaluate whether a spousal IRA might be beneficial for you.

How could you benefit from funding a spousal IRA?

Couples usually need to accumulate substantial pools of assets to fund retirement. Opening and funding a spousal IRA will allow more of your assets to grow tax deferred (Traditional IRA) or tax-free (Roth IRA). Depending on the type of IRA vehicle you open and your income level, your contributions may be tax deductible, providing you an immediate benefit by reducing your annual taxable income.

When is the deadline to contribute?

The deadline to contribute to an IRA (spousal or not) is typically April 15^th of the following year, which typically coincides with the tax filing deadline.   For example, you can complete a contribution for the 2021 tax year up until April 15^th, 2022.  For this reason, it is important to designate your contribution as intended for either the current or prior tax year.

What type of IRA is it — Roth or Traditional?

A spousal contribution may go into either a Traditional or Roth IRA. Your choice of which type of IRA will be driven by your current marginal income tax bracket and your expectation for your tax rate in the future. Based on provisions established by the SECURE Act, there is no longer an age limit for contributions to Traditional IRAs or Roth IRAs for 2020 and later years.  Previously, account holders over 70½ were not eligible to contribute to a Traditional IRA.

What is the most you can contribute?

The maximum contribution for a spouse for 2021 is the lower of the couple’s taxable compensation or $6,000. If the account holder is over 50 years old, then a $1,000 catch-up contribution can boost the maximum to $7,000. The contribution limits are the same for Traditional and Roth IRAs.  When making a Traditional IRA contribution, the amount that can be deducted on your tax return will be based on whether the earning spouse is covered by an employer-sponsored plan and the amount of your Modified Adjusted Gross Income (MAGI).

Eligibility to contribute to a Roth IRA is also based on the amount of your MAGI.

How should a spousal IRA be invested?

In a nutshell, they should be invested like any other retirement account. The tax deferral of IRAs makes them attractive vehicles for mutual funds that tend to distribute capital gains. Higher yielding asset classes might be better off in an IRA, since interest and dividends you receive might otherwise be taxed as ordinary income. All situations, of course, can vary.

How might a spousal IRA affect your estate planning?

You should take the same care designating beneficiaries for a spousal IRA as you would any other retirement account. Though IRA account owners will typically designate the surviving spouse as their primary beneficiary, you may wish to designate someone other than a spouse. Make sure to review your beneficiary designations periodically, too.  It may be advisable to discuss your beneficiary designations with your attorney in light of distribution rules for IRA inheritors set forth by the SECURE Act.

When might a spousal IRA not be right for you?

Withdrawing early from an IRA can lead to penalties and possibly even a higher marginal tax bracket. Though there are a few exceptions to the minimum withdrawal age of 59 ½ and a mandatory withdrawal age of 72, IRAs are generally intended to be invested for the long term. If there’s a good chance you will need that money earlier, then a retirement account might not be the best vehicle.

Remember, we’re here to help. If you have any questions on this or any other financial topic, please reach out.