Who Should Consider a Spousal IRA, According to a Financial Planner

If your employer does not offer a 401(k) plan, or if you want to save more money for retirement, you may consider creating an Individual Retirement Account (IRA). But in order to contribute to an IRA, you must be receiving taxable compensation as defined by the IRS , which means taxable wages or self-employment income. However, if you quit your job or make money under the table, you are missing out on an opportunity. Until…

If you are married and your spouse is still working, they can set up an IRA for you. Here’s how spousal IRAs work and the benefits of using them.

How spousal IRAs work

A spousal IRA is not really a separate type of IRA account – rather, it’s just a traditional IRA or Roth IRA created in the name of a spouse who has little to no income. This may include those caring for children or other family members, workers returning to school, or people who have left their jobs for other reasons.

To be eligible for a spousal IRA, you must meet several requirements:

  • You must file taxes as a “married joint filer”.
  • The earning/investing spouse must contribute enough to cover contributions to both their own IRA and the spouse’s account.
  • In 2022, the IRA contribution limit is $6,000 per year for those under 50 and $7,000 for those aged 50 and over. A couple can deposit a total of $12,000 into both accounts: $13,000 if one spouse is 50 or older, and $14,000 if both spouses are 50 or older.
  • There are income-based contribution limits for Roth IRAs and tax deduction limits for traditional IRAs, depending on your tax status. This may affect the choice of account type.

One of the keys to a spousal IRA is that ownership remains with the person named on the account, no matter which spouse contributes. It also means that an existing IRA funded while the account holder was employed may be a spousal IRA , if that person is no longer earning income and their partner is contributing to the account on their behalf.

Should you create a spousal IRA?

If you qualify and have the financial means to make the most of multiple retirement accounts, then you should probably consider a spousal IRA.

Spousal IRAs are the right choice for many couples, says Catherine Valega, a certified financial planner with Green Bee Advisory in Massachusetts.

“In many cases, if one spouse is not working, they are foreclosing pension assets in their name, not to mention reducing the couple’s growth opportunities through tax deferrals,” says Valega.

As mentioned, you can use either a traditional IRA or a Roth IRA as a spousal account. The first uses pre-tax income, reducing your tax burden now, while the second comes from after-tax income and can be used later tax-free. Generally, those looking to earn more in the future are more likely to consider the Roth route, but you should do some research and maybe consult a financial planner if you’re not sure which option is best for you.

What happens to an IRA spouse upon divorce?

While spousal IRAs may be advertised as financial protection in the event of a divorce, it’s not that easy. Depending on the time the account was opened and the laws of your state, retirement accounts may be considered family assets and segregated accordingly.

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