You need to earn income to contribute to a Roth IRA (or a traditional one). But if you're married, you can use a spousal Roth IRA to boost your retirement savings potential—even if only one spouse works for pay.

Key Takeaways

  • You need to have “earned income” (taxable compensation) to contribute to a traditional or Roth IRA.
  • An exception to this rule is a spousal IRA, which allows someone with earned income to contribute on behalf of a spouse who doesn’t work for pay.
  • A working spouse can contribute to both IRAs, provided they have enough earned income to cover both contributions.

An IRA is an excellent tool for retirement savings. These accounts were introduced in the mid-’70s as a way to help workers save for retirement and lower their taxable income.

It’s no surprise, then, that you must have income from a job to contribute to—and enjoy the tax benefit—of an IRA. According to IRS rules, you need to have “earned income” to contribute to a traditional or Roth IRA.

Despite that, there’s still a way for spouses to have their own IRAs, even if they don’t work for pay.

What Counts as Earned Income?

There are two ways to get earned income: Work for someone else who pays you, or run or own a business (or farm). Earned income includes:

Some types of income don’t count as earned income:

Your earned income must match or exceed your IRA contribution. For 2019, you can contribute up to $6,000, or $7,000 if you’re age 50 or older. So, to make the full contribution, you need at least $6,000 (or $7,000) of earned income. If you make less, you can contribute up to the amount you earned.

If you contribute more than you’re allowed to, you’ll owe a 6% penalty each year until you fix the mistake. 

The Spousal IRA Exception

You can contribute to a spousal IRA on behalf of a spouse who doesn’t have earned income. To do so, you must have enough earned income to cover both contributions. To fully contribute to both IRAs in 2019, your earned income would have to be at least $12,000, or $14,000 if you’re both age 50 or older.

Keep in mind that IRAs are individual accounts (thus the Individual in IRA). As such, a spousal IRA is not a joint account. Rather, you each have your own IRA—but just one spouse funds them both.

You must be married and file jointly to open a spousal IRA.

In order to take advantage of a spousal IRA, you have to be married, and your tax filing status must be “married filing jointly.” You can’t make a spousal contribution to an IRA if you file separately.

Spousal IRA Benefits

A spousal IRA is an excellent way for a spouse who doesn’t work for pay to save for retirement. Without the spousal IRA exception, spouses with no earned income could have trouble finding a tax-advantaged way to save for retirement.

If one spouse has already maxed out his or her own IRA contributions, it can be a great opportunity for couples to enhance their tax-advantaged retirement planning.

Your spouse can name you as the beneficiary of the spousal IRA. But once you start contributing to the account, the money is your spouse’s. This becomes important if you separate or divorce in the future.

A spousal IRA remains intact even if the spouse without earned income starts to receive pay for work. In this case, he or she can still contribute to the IRA, according to regular IRA rules.

Traditional or Roth IRA?

A spousal IRA is an ordinary IRA set up in a spouse’s name. You can set it up as either a traditional or Roth IRA.

The biggest difference between the two IRAs is when you get the tax break. With a traditional IRA, you deduct your contributions now and pay taxes later when you take distributions.

With Roth IRAs, however, there’s no upfront tax break. But your contributions and earnings grow tax-free, and qualified distributions are tax-free, as well. There are other differences, as well. Here’s a quick rundown.

Roth and Traditional IRA: Key Differences
Feature Roth IRAs Traditional IRAs
2019 Contribution Limits $6,000, or $7,000 if you're age 50 or older $6,000, or $7,000 if you're age 50 or older
2019 Income Limits High earners may not be able to make contributions High earners may not be able to deduct contributions
Tax Treatment No tax break for contributions; withdrawals are tax-free in retirement Tax deduction for contributions; withdrawals taxed as ordinary income
Tax-Free Withdrawals Withdraw contributions at any time; earnings after age 59 1/2, provided it's been at least five years since you first contributed to an IRA Starting at age 59 1/2 
Required Minimum Distributions No RMDs during the account holder’s lifetime; beneficiaries can stretch distributions over many years Distributions must begin at age 70 ½; beneficiaries pay taxes on inherited IRAs

In general, a Roth IRA is a better choice if you expect to be in a higher tax bracket in retirement than you're in now. If you do, it's better to pay your taxes now, at the lower rate, and enjoy tax-free withdrawals later.

They're also a good idea if you don't think you'll need to take money out of your IRA. There are no required minimum distributions during your lifetime, so you can leave the entire account to your beneficiaries.

The Bottom Line

A spousal Roth IRA can be a good way to boost your tax-advantaged retirement savings if your household has just one income. You'll pay taxes now and withdraw funds tax-free later on, when you might be in a higher tax bracket.

Also, it can be a way to provide a measure of financial security for a spouse who does a great deal of work—but who may not be financially compensated for it.

Remember: A spousal IRA can be structured as either a traditional or Roth IRA. If you're not sure which type of IRA would benefit you and your spouse more, speak with a trusted financial advisor.