What is a spousal IRA?

  • By James Royal,
  • Bankrate.com
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A spousal IRA allows a working partner to open an individual retirement account (IRA) for a non-working spouse to save for retirement. That can be especially beneficial in times of economic upheaval, where one spouse is out of work or has limited earnings. It can also be advantageous for ensuring that a stay-at-home spouse builds up a nest egg for the future.

How a spousal IRA works

Typically, only working individuals can contribute to an IRA, according to the IRS’ contribution limits. However, for married couples, there’s an exception to the rule. Spousal IRAs permit a working spouse to put money aside for retirement for a non-working spouse with tax-free or tax-deferred growth, or both.

The spousal IRA is sometimes known as the Kay Bailey Hutchison Spousal IRA, after the former U.S. senator who championed its creation. The spousal IRA can be a powerful tool for married couples to build wealth as the working spouse doubles the couple’s tax-savings efforts. For example, a combined annual contribution of $12,000 over 30 years at a 5 percent compound return can amount to over $800,000 in retirement savings.

Rules for spousal IRAs: Here’s who qualifies and what the contribution limits are

A couple must file a joint tax return (married filing jointly) to meet the criteria for a spousal IRA. Each spouse can contribute up to the annual maximum ($6,000 in 2022 for those under age 50; $7,000 for those over age 50), but the total contribution cannot exceed the taxable compensation reported on their tax return.

So, a couple must report earnings of at least $12,000 to make a maximum contribution if they’re under 50 years old, or $14,000 if they’re both over that age. Otherwise, the IRS limits their contribution based on their income.

Also, it’s important to note that a spousal IRA is not a joint IRA. Instead, each spouse has an account under their own name.

The spousal IRA can be either a traditional IRA or a Roth IRA and is subject to the same rules and restrictions as these plans:

  • Traditional IRA – With a traditional IRA, participants contribute money on a pre-tax basis (so they’re not taxed on it, though deductibility is limited) and can grow their contributions tax-deferred until they withdraw them at retirement.
  • Roth IRA – With a Roth IRA, participants contribute money on an after-tax basis (though there are income limits) and can grow their contributions tax-free until they withdraw them tax-free at retirement.

Things to remember for spousal IRAs:

  • Funding doesn’t mean ownership – Each spouse is the sole account owner of their IRA and has control over the investments, beneficiaries and withdrawals for the account. It doesn’t matter who made the contributions.
  • Must file joint tax returns – Married couples must file a joint tax return to be eligible for a spousal IRA.
  • No age limit for contributions – You can contribute to your IRA as long as you want as long as one spouse is generating earned income.
  • Total income threshold for Roth IRA contributions – If you and your spouse make a combined $204,000 or less in 2022, you can contribute up to the limit in a Roth IRA. The contribution amount is reduced above $204,000 and you can’t contribute if you and your spouse make $214,000 or more.

Key considerations

Both traditional and Roth IRA plans have advantages and disadvantages, so it’s essential to understand the differences.

You’ll also want to review the limits on these IRA plans because they may reduce your ability to deduct pre-tax contributions (as in the traditional IRA) or participate in the Roth IRA.

For example, if you participate in an employer-sponsored retirement plan such as a 401(k), the deductibility of contributions to a traditional IRA may be limited or eliminated. However, if neither spouse participated in such a plan, contributions to a traditional IRA will be tax-deductible.

And if you exceed the income limits on contributions to a Roth IRA, it’s possible to work around the rules by using a backdoor Roth IRA.

Like typical IRAs, you must make contributions for this tax year by tax day in the following calendar year. For instance, contributions to your 2022 IRA are due by April 15, 2023, or later if you request an extension.

If you need help figuring out how to open or manage an IRA, we’ve put together a guide that covers everything you need to know.

Bottom line

The spousal IRA is the lone exception to the rule that you must have earned income to contribute to an IRA. As a result, it’s a valuable investment strategy for getting non-working spouses access to a retirement plan, whether they’re out of the workforce for a few months, years, or indefinitely.

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