How Does a Spousal IRA Work?

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Saving for retirement is absolutely essential as we are more likely to achieve economic independence later in life. We usually think of retirement savings as a percentage of our income. But what happens if you don’t have an income? 

If you are married and not formally employed, and your spouse is working, they can open an IRA in your name. These IRAs are known as Spousal IRAs. Let’s have a deeper look into the ins and outs of how a Spousal IRA works, including how to contribute, how much, types of account, and the basic rules. 

What Is a Spousal IRA?

A Spousal IRA is a Traditional or Roth IRA in the name of your spouse. The contributions are made by the working spouse. This setup allows spouses with no income to save for retirement. The term Spousal IRA refers to the fact that the IRA is funded by another person within the same household and not the owner of the IRA.

What Is a Non-Working Spouse?

A non-working spouse is someone that is married and does not have any earned income. This situation may arise due to various circumstances, the important thing is to not have any earned income in your name. In which case, your working spouse may contribute to your IRA.

The table below shows examples of what is and what isn’t considered as income when you are considering a Spousal IRA.

Earned Income Spousal IRA

What Can a Spousal IRA Invest In?

Spousal IRAs are the same as any other type of IRA. You are therefore limited in which investments you can make depending on the type of IRA. If you open a  conventional IRA (e.g., non-self-directed), you will only be able to invest in traditional assets such as stocks, bonds, and mutual funds. 

To gain access to alternative investments such as gold you would need to open a Spousal Self-Directed IRA. With Self-Directed IRAs, you can also invest in alternative assets such as Bitcoin or real Estate.

Types of Spousal IRA

You can open a Traditional IRA or a Roth IRA for your spouse, and they can be either Non-Directed or Self-Directed. With a Traditional IRA, you don't pay any taxes on the contributions you make up to the yearly limit. 

This is known as a tax-deferred status. Your money grows tax-free while it is invested in the IRA. You will also be obligated in taking distributions when you reach a certain age. The IRS obligates you to take Required Minimum Distributions from the age of 72. 

With Roth IRAs, you make contributions after-tax, and your money grows tax-free. However, when it comes to taking distributions, you will not pay any taxes on the money you receive from your IRA. This is beneficial to those who believe they will be in a higher income tax bracket at retirement. 

How A Spousal IRA Works

A spousal IRA is in all effects a standard IRA, either Self-Directed or Non-Directed, where the working spouse contributes on behalf of the non-working spouse. These are the things you need to know to take full advantage of spousal IRAs.

 

  • First of all, you and your spouse must file a joint tax return. You will not be able to open a spousal IRA if you and your spouse file separate returns.

 

  • The Spousal IRA cannot be held as a joint account, the I in IRA stands for individual, and no joint accounts are contemplated by the IRS.

 

  • You can fund a spousal IRA regardless of age. As long as one of the spouses is working, they can fund their non-working spouse’s IRA regardless of their ages.

 

  • Your non-working spouse decides which investments to make within the IRA. You fund your spouse’s IRA. However, the IRA is in your spouse's name, and as the owner of the IRA, they get to choose which investments they make.

 

  • A non-working spouse may choose who to name as the beneficiary of their IRA. They don’t need your consent on who they name, and they are not obligated to name their working spouse as the beneficiary. However, naming the spouse as the beneficiary has its advantages.

    According to the IRS rules for inherited IRAs, the spouse that receives the IRA as an inheritance can roll the fund over to their own IRA. Whether you were the working spouse or not has no impact on the benefits of receiving the IRA as an inheritance. The IRS will treat the money as if you were the original owner. 

 

  • If a spouse already has an IRA from previous working years, they can keep that account while receiving funds from their working spouse.

 

Contribution Deadline

The contribution deadline for Spousal IRAs works in the same way as your regular IRA. Contribution deadlines go by tax year. So, for the 2021 tax year, you can contribute to your IRA until April 15, 2022. 

If you exceed your contribution limit, you have until the due date of your tax returns to withdraw the extra money, including any extensions. If you do not withdraw the extra cash, you must pay a tax of 6% for each year the extra funds stay in the IRA. The deadline is valid for both your IRA and your Spousal IRA.

Contribution & Compensation Limits

The contribution you can make to a Spousal IRA is limited to $6,000 per year or $7,000 per year if you are 50 or older. This limit does not affect the contribution limit for your IRA which remains $6,000 or $7,000 if you are 50 or older.

You cannot contribute to your IRA and your Spousal IRA for more than your yearly income. Let’s say you earned $60,000, and your spouse is a stay-at-home parent. In this case, you could contribute up to $6,000 to each IRA, for a total of $12,000. If your income for the year was $10,000, your maximum contribution to both IRAs would be limited to your income.

For Spousal Roth IRAs there are further contribution limits based on the working spouse’s income. For 2022, if you are earning more than $214,000 a year, and filing jointly with your spouse, you cannot make contributions at all to a Roth IRA

If your income, known as Modified Adjusted Gross Income (MAGI), is between $204,000 and $214,000 you may contribute a reduced amount. To contribute the full annual limit for both IRAs you must have a MAGI under $204,000.

How to Calculate My MAGI

For most people, the IRS considers your Modified Adjusted Gross Income is the same as your Adjusted Gross Income (AGI), minus any student loan interest. However, you may have to add back to your MAGI other deductions made in your AGI. 

These are relatively rare deductions, but if you have them, they may significantly increase your MAGI. Examples of deductions that you must add back to your MAGI include.

  • Student loan interest
  • IRA contributions 
  • Tuition and fees
  • Half of self-employment taxes
  • Employer-paid adoption expenses
  • Passive losses or passive income
  • Rental losses
  • Taxable Social Security payments 
  • Foreign earned income or housing exclusions
  • Any losses from publicly traded partnerships

You can find your AGI itemized on your previous tax returns. For 2020, it was on line 11 of Form 1040 and 1040-SR.

Bottom Line

Funding a spousal IRA for a non-working spouse allows you to maximize your retirement savings as a married couple. Consider a spouse that stays at home for 5 years then goes back to work for 25 years. During these 25 years, the spouse contributes the current yearly limit of $6,000. 

At retirement, the spouse would have $473,000 with a growth rate of 8% per year. If the working spouse had continued to contribute on behalf of the non-working spouse for those 5 years, the total after 30 years would rise to $734,000.

Banks, brokerage houses, and other IRS-approved institutions offer Spousal IRAs. It may be easier to set one up with your current provider of IRA services. Or you may want to shop around as now you will have a higher overall cost with multiple IRAs.

You can open a standard Non-Directed IRA to invest in traditional assets for your spouse. However, to get the full benefits of diversification and growth from a real asset, you may want to add gold to your portfolio. You can add gold as an investment to your spousal IRA when you open a Self-Directed IRA. Find out more about spousal IRAs with our free guide.

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Gino D'Alessio

Gino D'Alessio is a broker/dealer with over twenty years experience in various OTC markets such as bonds, FX and derivatives. He is currently a financial markets and investments writer & analyst.

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