Spousal IRAs allow married couples in which one spouse works and one does not to make IRA contributions to the account of the non-working spouse. Typically, in order to contribute to an IRA, you need to have earned income. Spousal contributions create a way around this restriction. Spousal IRAs are a great way to increase your savings as a couple and ensure the non-working spouse has a retirement account of their own. A spousal contribution can also allow you to contribute more than you otherwise could if you work but earn a small amount of money. These accounts can be either traditional IRAs or Roth IRAs.

Setting up a Spousal IRA is a very straightforward process. Simply open an IRA in the non-working spouse’s name. IRAs, as the name suggests, must be individual. This means they cannot be jointly titled. Keep in mind that once a contribution is made, the assets are 100% owned by the person on the title of the account.

Contribution limits for Spousal IRAs follow the same rules as other types of IRAs. In 2021 and 2022, the maximum annual contribution to an IRA is $6000 (or $7000 if you are age 50 or older). This means a couple can contribute a maximum of $12,000 per year if they are both under age 50. This contribution limit applies to all contributions to all IRAs.  $6000 is the maximum amount that may be contributed to a taxpayer’s IRA in a year. For example, you could contribute $3000 to a Roth IRA and $3000 to a traditional IRA, but not $6000 to both. For spousal IRAs, the couple must have at least the amount of the total contributions in earned income.

Contributions made to a traditional IRA, spousal or otherwise, are typically tax-deductible. This means that your taxable income is reduced by the amount of traditional IRA contributions made in a given tax year. Deductibility is limited based on rules on active participation and income. Contributions can be made to IRAs up to the tax filing deadline. This means you can make contributions for the previous tax year up until April 15^th of the current year. Occasionally, the tax filing deadline will be pushed back giving you more time. This occurs when the 15^th falls on a weekend or holiday.

Active participation rules can get tricky, so it’s important to work with a CFP® or CPA who is well versed in the rules if you’re not sure about your status. At the most basic level, you are considered an active participant if you have a workplace retirement plan, like a 401(k), SIMPLE, or SEP, available to you and annual additions are made for the tax year. Annual additions include any money that flows into your account: employer contributions, employee contributions, forfeitures, and profit-sharing contributions all count. You are also considered an active participant if you are eligible to participate in your employer’s defined benefit plan. However, participation in a 457 plan (whether governmental or non-governmental) does not make you an active participant. The IRS has a good resource on active participation rules here.

If neither spouse is an active participant, IRA contributions to traditional IRAs are deductible. For spousal traditional IRAs when one spouse is an active participant in a retirement plan and the other is not, the IRA deduction is phased out over income levels between $198,000 and $208,000 for 2021 and $204,000-$214,000 in 2022. Contributions can still be made to a traditional IRA, but these contributions are considered “nondeductible contributions” and do not reduce your taxable income in the year the contribution was made. Nondeductible contributions are not without benefit, but we recommend working with a CERTIFIED FINANCIAL PLANNER™ to determine the best course of action if you find yourself over the deductibility limit. For Roth IRAs, contributions are limited based on income. For married couples filing jointly, Roth IRA contribution eligibility is phased out over the $198,000 – $208,000 level in 2021 and $204,000-$214,000 in 2022. We have written extensively on the differences between traditional IRAs, Roth IRAs, and non-deductible contributions here.

The SECURE Act of 2019 changed some of the rules for IRAs. The starting age for Required Minimum Distributions (“RMDs”) has been raised to 72 and IRA owners can now make contributions regardless of age. This makes the spousal IRA all the more attractive for older contributors and couples where one spouse is still working and the other is retired. We have more information on the SECURE Act here and here.

In the right situation, spousal IRAs can be very beneficial and can save you money on taxes. We are well versed in establishing IRAs, managing IRA assets, and retirement planning. Please reach out to us if you have any questions on IRAs or any other type of retirement plan.