If you are married and file a joint tax return, your federal tax rate may be lower than that of an unmarried individual. That's just one example of the ways in which U.S. tax laws are written to provide married couples with greater benefits than those received by other individuals.
The same is true for retirement plans, which offer several perks for those who have tied the knot. These benefits are especially important for nonworking spouses who support their marriages in less financially obvious ways, such as running a household and raising children.
- Spousal IRAs are options available to couples who file joint tax returns.
- They can maximize a couple's retirement nest egg even if one spouse doesn't work.
- These plans provide individuals with greater tax-deferred growth that can be used to support each other in retirement.
- The default beneficiary for retirement assets is a spouse in most states, which means individuals need their express authorization to override that designation to a different beneficiary.
- Ensure you know the rules associated with inherited assets, including spousal IRAs.
Spousal IRAs for Nonworking Spouses
A spousal individual retirement account (IRA) is simply a typical Roth or traditional IRA that is used by married couples. Each IRA is set up in the name of an individual spouse.
Using a spousal IRA strategy allows couples who are married filing jointly to contribute $12,000 in 2021 and 2022 ($6,000 for each) to IRAs per year. That limit increases to $14,000 ($7,000 for each) per year if they are age 50 or older, due to the catch-up contribution provision.
You must have taxable compensation in order to make contributions to a spousal IRA. But there's an exception for individuals who don't have taxable income but file a joint tax return with a spouse who does. The earning spouse can make a spousal IRA contribution to their nonworking spouse's IRA, provided they earn at least as much income as they contribute to their spouse's (and their own) IRA.
Although one spouse may be able to contribute to a spousal IRA, it is not a joint account. This means that it can only be in one spouse's name.
Control Over Beneficiary Designations
The owner of a retirement account can generally designate a beneficiary of their own choosing. But in certain cases, the account holder's spouse must consent to the designation if they are not the sole primary beneficiary. This ensures that your spouse does not designate someone else to receive death benefits from their retirement accounts without your approval.
Qualified Plan Beneficiary Requirements
If your spouse has assets in a qualified plan account, such as a 401(k), they are required to designate you as the sole primary beneficiary. Plan administrators generally won't accept beneficiary designations unless the spouse is the sole primary beneficiary or consents to an alternate designation, and the consent must be witnessed by a notary public or a plan representative.
Beneficiaries in Community Property States
Community property is generally defined as property acquired during a marriage. Spousal consent is generally required if the IRA owner designates any party other than their spouse as the primary beneficiary in a community property state, where any assets that are acquired together are divided equally during the marriage.
Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin are community property states. Alaska has an opt-in law that allows residents to have their property treated this way.
Check with a tax attorney to find out if the following rules also apply in your state:
- If you reside in a community property state and you plan to get married and don't want to designate your new spouse as the beneficiary of your pre-marriage IRA, you may want to keep your pre-marriage and post-marriage IRA assets separate.
- Inherited IRAs are usually not defined as community property, and spousal consent may not be required to designate someone other than your spouse as the primary beneficiary.
Preventing Distributions Without Spousal Consent
Retirement plan participants often deplete their retirement assets without the knowledge of their spouses. This can be a devastating revelation to a spouse who was counting on those funds to finance the couple's retirement years.
If the assets are in a defined-benefit, target-benefit, or money-purchase pension plan, spending those assets is unlikely to occur without the spouse's knowledge because they are generally required to be distributed in the form of a qualified joint and survivor annuity (QJSA), unless the participant and the spouse consent in writing to receive distributions in another form.
Exceptions apply to assets that are required to be distributed from the plan, including excess contributions, required minimum distributions (RMDs), and amounts that can be cashed out without the participant's consent. Amounts can be cashed out in most cases without the participant's consent if their accrued balance under the plan is $5,000 or less.
While the QJSA rules always apply to all of the plans noted above, they don't apply to profit-sharing and 401(k) plans unless they are designed to include these options. Some profit-sharing and 401(k) plan documents, such as prototypes, are designed to allow employers to elect whether they want the plan to be subject to the QJSA rules.
Treating Inherited Assets as Your Own
If you inherit retirement plan assets, your options for distributing the assets may fall into one of these options:
If the retirement account owner dies before the required beginning date (RBD):
- Distribute the assets over your life expectancy. If there are multiple beneficiaries for the retirement account, the life expectancy of the oldest beneficiary is used, unless the assets are split into separate accounts by September 30 of the year following the year the owner dies. If the split occurs by then, each beneficiary may use their own life expectancy. Distributions must begin by December 31 of the year following the year the retirement account owner dies.
- Distribute the assets based on the five-year rule.
- Accelerate distributions for either of the above up to distributing the entire balance in a lump-sum payment.
If the retirement account owner dies on or after the RBD:
- Distribute the assets over your life expectancy or the life expectancy of the decedent, whichever is longer.
- Accelerate distributions up to distributing the entire balance in a lump-sum payment.
If you are the deceased retirement account owner's spousal beneficiary, the options explained above are available to you, but you also have the following options:
If the retirement account owner dies before the RBD:
- If you elect to distribute the assets over your life expectancy, you need not begin distributions until the year the decedent would have reached age 72.
- You can roll the amount over to your own IRA or other eligible retirement plan and need not begin distributions until you reach age 72. In this case, distributions would be based on the uniform life table, which assumes that you have a beneficiary not more than 10 years your junior, or the joint life expectancy table if you remarry someone more than 10 years younger than you are. You can find these life expectancy tables in IRS Publication 590-B.
If the retirement account owner dies on or after the RBD:
- You can roll the amount over to your own IRA or other eligible retirement plan and need not begin distributions until you reach age 72. Similar to the above, you would be able to use the uniform or joint table to calculate your RMD amounts.
The Bottom Line
Most of the benefits discussed in this article are meant to protect spouses, including those who do not have regular jobs but provide other forms of family support while the other spouse works at an income-producing job.
If you are not working at a paid job and want to fund your IRA, consider using your spouse's income as your taxable compensation. And if you are a qualified plan participant or an IRA owner, check with your plan administrator to determine whether you need to obtain the consent of your spouse for distributions and loans.
Be sure to check with your IRA custodian to determine whether you need your spouse's consent if you decide to designate someone else as the primary beneficiary of your IRA.