Retirement planning is a very integral part of an individual's long-term financial goals. Coming up with a retirement plan involves determining when you expect to retire as well as figuring out your goals, how much you want to set aside, and how much money you'll need when you're ready to call it quits. Once you have that information, you'll need to choose the right investments. If you're married, there are special rules you'll have to follow when you're saving up for retirement.
While you can designate a spouse (or someone else) as the beneficiary of an individual retirement account (IRA), you can't hold a joint account. That's because IRAs can only be maintained in one person's name. You can't participate in the same IRA, so if you're married, you'll have to have separate investment accounts.
The Internal Revenue Service (IRS) has provisions in place for retirement accounts designed for married couples. There is a special account called the spousal IRA. Sounds exciting, right? There are certain rules you need to know about before you head out to your investment specialist to set one up. We list some of the basics of the spousal IRA to help you navigate through the process.
- A working individual can make contributions to their spouse's retirement account by establishing a spousal IRA.
- Spousal IRAs are not joint accounts but are held in the spouse's name even if the working spouse contributes.
- Couples can choose to open a traditional or Roth IRA, or they can contribute to existing IRA accounts.
- The IRS limits contributions and tax deductions based on the couple's combined modified adjusted gross income.
- Both spouses must file joint tax returns in order to qualify for a spousal IRA.
Naming a Spouse as Beneficiary
Spousal IRAs allow a working individual to contribute to their spouse's IRA as long as that person doesn't work or doesn't have enough income to support contributions. This rule allows one spouse to contribute to their partner's IRA so that both may take advantage of the maximum contribution limits.
But just because one spouse contributes to the other's IRA, this doesn't mean it becomes a joint account. In fact, only the named spouse can benefit from the IRA even though the other contributes. There is a way, though, for the contributing spouse to benefit if the account holder wants to give their spouse access to the account. They can do this by designating their spouse as their IRA's beneficiary.
As an aside, you can name someone other than your spouse as the beneficiary. But certain states do require your spouse to provide written consent if the account owner wishes to designate a different beneficiary. For this reason, it is so important to review beneficiary designations periodically to determine if any updates or changes must be made.
Making withdrawals from your IRA account before you are allowed automatically incurs a 10% penalty. You may also be responsible for additional taxes on the amount withdrawn.
Creating a Spousal IRA
Spousal IRAs effectively allow married couples to maximize their retirement contributions when one partner may earn little or no income. In order to qualify for spousal IRAs, there are a few mandates that couples must satisfy, including:
- Filing a joint income tax return for the year in which the spousal IRA is created.
- Demonstrating an earned income or other eligible compensation that either equals or exceeds the total amount of the collective contributions made to the two IRAs.
Age and Contribution Limits
The age limits on traditional IRA contributions were repealed by the Setting Every Community Up for Retirement Enhancement (SECURE) Act, which has prompted sweeping changes across the retirement planning landscape. This means there is no age limit as to who can contribute to a traditional IRA.
A couple with sufficient income can fund both of their IRAs to the allowable maximums for that year. In 2022, for example, the maximum is $6,000 for anyone under the age of 50 for a traditional IRA (increasing to $6,500 in 2023). That amount increases by $1,000 for those 50 years of age and over, in what are known as catch-up contributions. Depending on their ages, a couple may be able to contribute as much as $14,000 to their two IRAs (or $15,000 in 2023), effectively doubling their retirement savings for the year.
Contributions for Roth IRAs depend on a couple's combined modified adjusted gross income (MAGI). For the 2022 tax year, a full contribution is allowed if their MAGI is less than $204,000 while a partial contribution is permitted if the MAGI falls between $204,000 and $214,000. No contribution is allowed if their MAGI exceeds $214,000. In 2023, these phase-out limits increase to $218,000 and $228,000.
Spousal IRAs demand that participants maintain a keen knowledge of the rules pertaining to tax deductions for traditional IRA contributions, as well as income limits for Roth IRA eligibility. This will help individuals gauge the tax impact of the decisions that factor into their broad retirement planning goals.
Spousal IRAs have been around since the 1980s. That's when Congress recognized the need for nonworking married individuals to be able to save for retirement by letting their spouses contribute to IRAs. Individuals were allowed to put aside a maximum of $2,250 to IRAs for themselves ($2,000) and their spouses ($250) and receive a tax deduction under the Economic Recovery Tax Act of 1981 (ERTA).
This investment vehicle has evolved significantly over the years right down to the contribution limits set by the IRS. Limits are adjusted for inflation and reported annually by the IRS. And individuals can choose to make contributions to a traditional or Roth spousal IRA.
Traditional Spousal IRA
This investment relies on pretax contributions that grow on a tax-deferred basis, which means withdrawals are only taxed as ordinary income when the account holder makes withdrawals during retirement.
The full contribution, on the other hand, can be used as a tax deduction on the couple's joint annual tax returns provided the working spouse isn't covered by an employer-sponsored retirement plan. The following table highlights income limits based on an individual's MAGI and the total deduction allowed by the IRS for 2022 and 2023:
|Roth Income Phase Outs|
|Combined MAGI 2022||Combined MAGI 2023||Deduction|
|$204,000 or less||$218,000 or less||Full deduction up to the total contribution limit|
|Between $204,000 & $214,000||$218,000 - $228,000||Partial deduction|
|$214,000 or more||$228,000 or more||No deduction|
Roth Spousal IRA
Individuals can contribute after-tax dollars to Roth IRAs, whether that's for themselves or for their spouses. Since contributions are not tax-deductible, distributions taken from this kind of IRA are tax-free as long as you meet certain requirements, including:
- Taking withdrawals after age 59½
- Allowing contributions to vest for a holding period of at least five-years
The IRS allows individuals to make early withdrawals under certain circumstances without incurring any penalties. Penalty-free withdrawals include payment for unreimbursed medical expenses, health insurance premiums during unemployment, home purchases or improvements, and for higher education expenses among others.
No one ever wants to think about divorce. But it's a very important factor to consider when it comes to the fate of your spousal IRA, not to mention any of your other assets.
If you and your spouse legally separate or divorce before the end of the year, your spouse cannot claim any tax deductions for contributions made to your IRA. This means that contributions become subject to individual savers and filers. More specifically, you assume responsibility for claiming deductions on your contributions and your spouse can only do so for theirs.
Just because you're divorced, though, doesn't mean that your spouse can't make a claim against your assets, including your spousal IRA. In fact, your spouse doesn't have to be the beneficiary to take control of your IRA account. The settlement may allow your IRA to be rolled over into one held by your ex. It's always a good idea to consult a legal professional about what the implications are in the case of separation or divorce.
Example of a Spousal IRA
Here's a simple hypothetical example to show how spousal IRAs work. Let's say you and your spouse have your own IRAs that you opened and funded before you got married. Your spouse decides to stay home while you work, earning $125,000 per year. You want your spouse to be able to have some money set aside for their retirement even though they aren't working.
Your financial advisor suggests dividing up your money between both of your accounts. You can easily do so by making equal contributions up to the maximum for each of you—$6,000 in 2022 for you and $6,000 for your spouse because you're both under 50 (this increases to $6,500 for 2023). Remember, as per IRS rules, you can't exceed the maximum contribution limit of $6,000 for your own. This allows you to deposit $6,000 to your spouse's IRA. You must file your tax returns jointly in order to qualify.
What Is a Spousal IRA?
A spousal IRA is a special retirement savings account that lets a working individual make contributions to an IRA for their spouse. The spouses in whose names contributions are made may be nonworking or may have very little income. In order to qualify, though, the working/contributing spouse's income must either be equal to or exceed the amount contributed for both individuals. Both spouses must file joint tax returns if they're contributing to a spousal IRA. Even though one spouse contributes, the account is not joint, which means that the named spouse is the account holder. A spousal IRA can be either a traditional or Roth IRA.
How Can I Open a Spousal IRA?
You can use an existing account in your spouse's name that you can fund. Or you can open a brand new account in your spouse's name the same way you would if you opened your own. You'll need to go to a broker, financial services company, investment house, or a robo-advisor. Any of these entities can open an account for you. You will need some basic information, including your name, address, Social Security number, and birth date along with those of your spouse. Both spouses must file their annual tax returns jointly in order to qualify.
What Are the Rules for a Spousal IRA?
The IRS has certain rules in place pertaining to spousal IRAs. For instance, a spousal IRA is never a joint account even if one spouse contributes to the account. As such, the spouse whose name is on the account is the only one who benefits. In addition, both spouses must file joint tax returns. Not only must individuals adhere to annual contribution limits, but the income of the contributing spouse must be more than or equal to the contributions made for both spouses.
The Bottom Line
Everyone wants to have a nest egg of their own ready for them when they retire. It may be a little challenging, though, if you're unemployed or don't make enough money to set aside. But if you're married, you may still be able to contribute by having your spouse make the contributions for you to a spousal IRA. If you choose to do so, make sure that you are aware of contribution limits, rules about deductions and withdrawals, and that you're both filing your tax returns jointly.
Theodore E. Saade, CFP®, AIF®, CMFC
Signature Estate & Investment Advisors LLC, Los Angeles, CA
An IRA cannot be held jointly by spouses. It can only be held in one individual’s name.
But one workaround, depending on what you’re trying to accomplish, would be to appoint the accountholder’s spouse their power of attorney. When triggered, a limited power of attorney would authorize the spouse to make trades within the account; a full power of attorney would allow the spouse to make withdrawals and transfers from the account as well.
You should check with the brokerage firm that is the custodian of your IRA to see if it can accommodate a power of attorneyship; it may require you to fill out a proprietary authorization form.
Internal Revenue Service. "Retirement Topics - Beneficiary."
Internal Revenue Service. "Publication 590-A: Contributions to Individual Retirement Arrangements (IRAs)."
Ed Slott and Company. "You Usually Don't Have to Name Your Spouse as IRA Beneficiary."
Internal Revenue Service. "Retirement Topics - IRA Contribution Limits."
U.S. Congress. "H.R.1865 - Further Consolidated Appropriations Act, 2020."
Internal Revenue Service. "2022 Limitations Adjusted as Provided in Section 415(d), etc."
Internal Revenue Service. "2021 Limitations Adjusted as Provided in Section 415(d), etc."
Internal Revenue Service. "Amount of Roth IRA Contributions That You Can Make for 2022."
United States Senate Committee on Finance. "Summary of the Economic Recovery Tax Act of 1981," Page 2.