The spousal IRA is a valuable but often overlooked retirement savings option that can significantly benefit married couples, especially those with disparate incomes or where one spouse has little to no earned income. This mechanism allows a working spouse to contribute to an IRA on behalf of a non-working or lower-earning spouse, effectively doubling a couple’s IRA savings potential.
History and Evolution
The spousal IRA was introduced as part of the Tax Reform Act of 1986, aimed at addressing the retirement savings gap for non-working spouses, typically women who left the workforce to care for children or family members. Importantly, a spousal IRA is not a separate type of individual retirement account. Rather, it is a provision in the tax code (specifically, section 219(C), and subsequently titled in honor of former U.S. Senator Kay Bailey Hutchison) allowing a working spouse to fund an IRA for a spouse with little or no earned income. In other words, it is an exception to the rule that one must have earned income to contribute to their own IRA.
Initially, the contribution limits for spousal IRAs were lower than those for regular IRAs. However, over time, these limits have been equalized, allowing couples to maximize their retirement savings. The Economic Growth and Tax Relief Reconciliation Act of 2001 further enhanced the spousal IRA by increasing contribution limits and introducing catch-up contributions for individuals aged 50 and older.
How Spousal IRAs Work
A spousal IRA functions much like a regular IRA, with a few key differences:
- Eligibility: The couple must file a joint tax return, and the working spouse must have enough earned income to cover the contributions for both IRAs.
- Contribution Limits: For 2024, the contribution limit is $7,000 per account, with an additional $1,000 catch-up contribution for those 50 and older.
- Ownership: The spousal IRA is not a joint account; rather, it is owned and controlled by the non-working spouse, regardless of who funds it.
- Type of IRA: Couples can choose between traditional and Roth spousal IRAs, each with its own tax advantages.
Benefits for Early Retirees and Semi-Retired Couples
Spousal IRAs can be particularly advantageous for early retirees and couples where one spouse is semi-retired (for example, has consulting income or part-time work) while the other has little or no earned income. Here’s why:
- Continued Retirement Savings: Even if one spouse has retired early or transitioned to part-time work, the couple can continue building their retirement nest egg through spousal IRA contributions.
- Tax Advantages: For traditional spousal IRAs, contributions may be tax-deductible, potentially lowering the couple’s current tax burden. Roth spousal IRAs offer tax-free growth and withdrawals in retirement (although Roth IRA contribution eligibility is subject to household income limits).1
- Maximizing Limited Income: For semi-retired individuals, the spousal IRA enables them to make the most of their earnings by contributing to both their own and their spouse’s retirement accounts.
- Bridging the Gap: Early retirement or semi-retirement often creates a gap between leaving full-time work and accessing traditional retirement benefits. Spousal IRAs can help bridge this gap by providing an additional source of retirement savings.
Strategies for Maximizing Spousal IRA Benefits
To make the most of spousal IRAs, consider the following strategies:
- Start Early: The sooner you begin contributing to a spousal IRA, the more you can benefit from compound growth.
- Maximize Contributions: Aim to contribute the full annual limit to both spouse’s IRAs if possible.
- Consider Tax Implications: Evaluate whether traditional or Roth IRAs are more beneficial based on your current and expected future tax situations.
- Coordinate with Other Retirement Accounts: If the working spouse has access to a 401(k) or other employer-sponsored plan, consider maxing out those contributions in addition to funding spousal IRAs (however, bear in mind there are income thresholds that determine eligibility for tax deductible Traditional IRA contributions if one spouse is covered by a workplace plan).
- Review Regularly: As your financial situation changes, regularly reassess your spousal IRA strategy to ensure it aligns with your overall retirement goals,
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In sum, the spousal IRA is a powerful tool that can significantly enhance a couple’s retirement savings. By leveraging this often-overlooked option, couples can work together to build a more secure and comfortable retirement, regardless of their individual earning situations.
As always, please feel free to contact me with any specific questions or comments.
1. These modified adjusted gross income limits (which, in 2024 for those married filing jointly, start at $230,000) pertain only to Roth IRA contributions, not Roth IRA conversions of pre-tax retirement accounts.
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