If you and your spouse both have access to an employer-sponsored retirement plan such as a 401(k), retirement saving is as easy as specifying the contribution amount to be deducted from your paycheck. However, for some couples, both spouses do not have access to a retirement plan through work. This could be due to one spouse to leaving full-time work for a period of time to care for children or parents. Or one spouse may have started a new business that currently doesn’t generate any income.
Lack of an income doesn’t have to mean neglecting tax-advantaged retirement. The IRS has created an exception to the rule that an individual must have earned income to make IRA contributions. It’s called a Spousal IRA. In this article, we detail the rules of the spousal IRA and some of the benefits it provides.
The Rules of the Spousal IRA
The spousal IRA is a regular IRA account and can be set up as either a Traditional IRA or a Roth IRA. It is an individual account held in the name of the spouse. To be able to open one, taxes must be filed as “married filing jointly.” The maximum contribution amount is the same – $6,000 per year (increasing to $6,500 in 2023), with an additional $1,000 catch-up for those age 50 and above.
If you set up a Traditional IRA and plan to take a deduction, there are some income limits to be aware of. The full amount is deductible if the working spouse is not covered by an employer’s retirement plan. The deductible phases out according to income level when the working spouse does have an employer sponsored plan. For 2022, if income is $109,000 or less, the full amount is deductible. A partial deduction may be taken if income is more than $109,000 but less than $129,000. At $129,000+ the contribution is not deductible. The income levels have been adjusted upwards for 2023. The full amount is deductible if income is $116,000 or less. A partial amount may be deducted if income is more than $116,000 but less than $136,000. At $136,000+ none of the contribution is deductible.
Taking Withdrawals and Distributions
The spousal IRA follows the same withdrawal rules – you need to be age 59 ½ to take money out, or you’ll get hit with the 10% early withdrawal penalty. Also, required minimum distributions (RMDs) will also need to be taken out of the account beginning at age 72.
If part of your retirement plan is to convert Traditional IRAs to Roth IRAs, you’ll need to do some careful planning. Taxes will be due on the amount withdrawn, potentially creating a significant tax burden in the year(s) of the conversion. The Roth conversion will reduce RMDs in the future, allow the account to remain invested, and simplify estate planning.
Security For a Longer Retirement
Contributing to a spousal IRA can add up considerably if done consistently, which will increase the total amount of retirement savings. Depending on income levels, it may also provide an additional tax deduction. But just as important, it’s a great way to for a spouse to continue to grow their nest egg when the decision is made for one partner to leave the workforce to care for children or other family members.
A spousal IRA expands the retirement savings toolkit for spouses who aren’t earning income. Contributing regularly can keep retirement savings on track and provide access to tax-free investment growth. This can be a compelling option for retirement savings. If you would like to talk about how a spousal IRA fits into your retirement strategy, please schedule a call with us here.
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