What Is a Spousal IRA?
A spousal IRA is a strategy that allows a working spouse to contribute to an individual retirement account (IRA) in the name of a non-working spouse with no income or very little income. This is an exception to the provision that an individual must have earned income to contribute to an IRA. However, the working spouse's income must equal or exceed the total IRA contributions made on behalf of both spouses.
Spousal IRAs are just regular Roth or traditional IRAs that are used by married couples. They are not joint accounts; each IRA is set up in the name of an individual spouse. For 2022, 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. For 2023, couples may contribute up to the new combined limit of $13,000 (or $15,000 after catch-up contributions).
- Spousal IRAs allow working spouses to contribute to an IRA for a non-working spouse.
- Spousal IRAs are the same as Roth or traditional IRAs but are designed for married couples.
- Couples must file joint returns to contribute to a spousal IRA.
- The amount for couples filing jointly to contribute to a spousal IRA for 2022 is $6,000 per individual and for 2023 is $6,500 per individual.
- If you are age 50 or older, you may contribute an extra $1,000 catch-up contribution.
How a Spousal IRA Works
The couple also must file a joint tax return (married filing jointly) to qualify for spousal IRA contributions. Spousal IRAs can be either traditional or Roth IRAs and are subject to the same annual contribution limits, income limits, and catch-up contribution provisions as traditional and Roth IRAs. While IRAs cannot be held jointly in both spouses' names, spouses can share their account distributions in retirement.
The IRS has extensive rules on how IRAs must be structured and specific guidelines on how spousal IRA strategies can be deployed. According to the IRS, the amount of your combined contributions cannot be more than the taxable compensation reported on your joint return. See the formula in IRS Publication 590-A. If neither spouse participated in a retirement plan at work, all of their contributions would be deductible.
IRS-approved institutions, including banks, brokerage companies, some credit unions, and federally insured savings and loan associations, offer spousal IRAs, and comparing brokers side-by-side can help you find the one that matches your investing needs.
To deduct spousal IRA contributions, the couple must file a joint tax return.
For single taxpayers covered by a work retirement plan the phase-out range is $73,000 - $83,000 in 2023, up from $68,000 - $78,000 in 2022. For married couples filing jointly, if the spouse making the IRA contribution is covered by a workplace retirement plan, the phase-out range is increased to $116,000 - $136,000 in 2023, up from $109,000 - $129,000 in 2022.
For an IRA contributor who is not covered by a workplace retirement plan and is married to someone who is covered, the phase-out range is increased to $218,000 - $228,000, up from $204,000 - $214,000. For a married individual filing a separate return who is covered by a workplace retirement plan, the phase-out range is not subject to an annual cost-of-living adjustment and remains between $0 and $10,000.
For tax year 2022, each half of a couple using a spousal IRA strategy can contribute $6,000, or $7,000 if they are age 50 or older, annually, but contributions must be made by the tax filing deadline for that tax year. In 2023, the limit grows to $6,500 (and $1,000 in catch-ups).
How to Open Spousal IRA
Though the term "spousal IRA" is used to describe a specific instance where an IRA rule can be overcome, opening a "spousal IRA" is no different from opening a regular IRA. The process begins by deciding the type of IRA to set up (often traditional or Roth). Then, you must choose a financial institution to open the account with. The financial institution will often ask for a range of personal information, especially since this information must be on file to remit proper tax forms in the future.
Once the financial institution has created the account, you'll be cleared to fund the account (keeping in mind the contribution limits based on MAGI discussed above). Once funds are in your IRA, you'll then be able to select the specific investments you want to hold. From time to time, you'll get investment statements from your financial institution and can often leverage an online login to view your IRA balance at any time.
Is a Spousal IRA a Good Idea?
A spousal IRA is almost always encouraged by financial advisors as a way for married couples with uneven incomes to maximize their tax efficiency. Though one spouse may not traditionally be eligible to make IRA contributions, leveraging the income of their spouse is one way to shelter or defer taxes for retirement.
Who Owns the Investments in a Spousal IRA?
A spousal IRA refers to an IRA that is funded by one working individual on behalf of their spouse. When the IRA is created, it is established under the name of that individual, not necessarily the individual that made the contribution. Though possession and division of assets is never straightforward during a divorce, the broad rule is the IRA belongs to the individual who's name is on the account (not who funded the account).
Can I Contribute to My Spouse's IRA if They Do Not Work?
Yes, special income rules apply to spouses that contribute to their other half's IRA if the spouse is not working.
Is a Spousal IRA the Same As a Traditional IRA?
In some cases, yes. A spousal IRA is simply a term used to describe a situation where one working spouse funds the IRA of their non-working spouse. During the creation of the spousal IRA, the individuals must decide which type of IRA they want to set up (often choosing between a traditional IRA or Roth IRA).
The Bottom Line
A spousal IRA is a "normal" IRA that is funded by one individual on behalf of their spouse. This situation often occurs when one person in a household is the primary income-generator and has substantially more income than the other. Though traditional rules stipulate income level requirements on IRAs, these rules are circumnavigated based on the spousal IRA exception.