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 law is 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 a marriage in less financially obvious ways, such as running a household and raising children.
- Spousal IRAs are a great way to maximize your household's retirement savings nest egg, even if your spouse does not work.
- This allows for greater tax-deferred growth that can be used to support each other in retirement.
- In most states, the default beneficiary for your retirement account assets will be your spouse, and you will need their express authorization to override that designation to a different beneficiary.
Spousal IRAs for Nonworking Spouses
A spousal IRA is simply a typical Roth or traditional IRA that are used by married couples. Note that these are not joint accounts; each IRA is set up in the name of an individual spouse. For both 2019 and 2020, the use of a spousal IRA strategy allows couples who are married filing jointly to contribute $12,000 to IRAs per year—or $14,000 if they are age 50 or older due to the catch-up contribution provision.
One of the eligibility requirements for making a contribution to an IRA is that you must have taxable compensation. But there's an exception for married individuals who have no taxable compensation and who file a joint tax return with a spouse who does have taxable earnings. The spouse who has taxable compensation is allowed to make a spousal IRA contribution to the IRA of a nonworking spouse, provided they have earned at least as much income as they contribute to their spouse's (and their own) IRA. As long as the nonworking spouse is under age 72, their spouse can contribute to a traditional IRA for them (there are no age limits for Roth IRA contributions).
Control over Beneficiary Designations
A retirement account owner can generally designate any party as the beneficiary of their retirement account. But in certain cases, if the account owner is married, their spouse must consent to the designation if the spouse is not the sole primary beneficiary of the retirement account. 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.
Beneficiary Designations in Community Property States
Community property is generally defined as property acquired during a marriage. If an IRA owner lives in a community property state, spousal consent is generally required if the IRA owner designates any party other than their spouse as the primary beneficiary of the IRA. 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 primary beneficiary.
Prevention of Distributions Without Spousal Consent
Quite often, retirement plan participants 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, depletion of 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 and amounts that can be cashed out without the participant's consent. In most cases, amounts can be cashed out without the participant's consent if his or her accrued balance under the plan is $5,000 or less.
While the QJSA rules always apply to all defined-benefit, target-benefit and money-purchase pension plans, this is not the case for profit-sharing and 401(k) plans. Instead, the QJSA rules apply to these plans only if the plan is designed to include those 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 are generally as follows:
- Distribute the assets over your life expectancy. (Note: 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 December 31 of the year following the year the owner dies. If the split occurs by then, each beneficiary may use his or her 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 70½, had he or she lived.
- You can roll over the amount 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.)
If the retirement account owner dies on or after the RBD:
- You can roll over the amount 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. In addition, 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. Also, 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.