If you are married and looking for ways to save more money for retirement, consider funding a spousal individual retirement account. A spousal IRA can be opened for a nonworking or nonparticipant spouse. A nonparticipant spouse is a husband or wife who is working but does not have access to a retirement plan through their employer. “What the IRS is attempting to do is to level the playing field for nonworking spouses or those who don’t have access to an employer plan,” said Christine Centeno, a certified financial planner and founder of Simplicity Wealth Management in Glen Allen, Virginia, in an email.
A spousal IRA also provides tax breaks to married couples and a variety of investment options. Before you open one, here’s what you should know:
— Spousal IRA rules
— Limits for contributing to a spousal IRA
— How to open a spousal IRA
— How to decide between a traditional and Roth spousal IRA
— How to contribute to a spousal IRA
Spousal IRA Rules
To make the most of a spousal IRA, it’s important to have a solid understanding of how this type of account works. Once you put money into the account, you can decide how to invest it. For instance, you might place some funds in mutual funds, stocks or bonds. “It’s a regular IRA like any other, subject to all the same rules as regular IRAs, but one with a key difference,” said Ryan Smith, a certified financial planner and principal at Paragon Financial Services in Richmond, Virginia, in an email. This difference lies in the requirements you must meet to put money into an IRA. “The IRS states that you must have earned income to contribute to an IRA,” Smith says. “With a spousal IRA, you don’t need to have any earned income at all, but your spouse does.”
[Read: IRA Rules: Contributions, Deductions, Withdrawals.]
Limits for Contributing to a Spousal IRA
The spouse with earned income can contribute to their own individual IRA while also putting funds into a spousal IRA. The total IRA contributions cannot exceed the amount of income brought in. Your household will need to earn an income that is equal to or more than what is contributed to the IRAs for the year, Centeno says. For example, if a wife earns $10,000 and the husband is not working, the household income is $10,000. Together, the couple can contribute up to $10,000 to IRAs. They might put $5,000 into an IRA for the wife and $5,000 into an IRA for the husband but do not have to contribute an equal amount to each IRA.
In addition, there are limits to the total amount that can be put into a spousal IRA during the year. For the 2024 tax year, the IRS allows up to $7,000 in contributions to an IRA for individuals under age 50. For those who are 50 or older, the limit is $8,000.
[Read: What Is a Good Monthly Retirement Income?]
How to Open a Spousal IRA
To contribute to a spousal IRA, you must meet the following criteria:
— You must be married.
— As a married couple, you must file your taxes jointly.
— The contributing spouse must have earned income equal to at least the amount annually contributed to the nonworking spouse’s IRA.
If you are eligible, you can open your spousal IRA at a nearby financial institution or online. “It’s easy to open a spousal IRA, whether it’s through an investment company or your local bank,” said Michael Gerstman, founder and financial advisor at the Dallas-based retirement planning firm Gerstman Financial Group, in an email. “Probably the biggest question to figure out is if you’re better off with a traditional spousal IRA or a Roth spousal IRA.”
How to Decide Between a Traditional or Roth Spousal IRA
A spousal IRA can be set up as a traditional IRA or a Roth IRA.
When you contribute to a traditional IRA, those funds may be tax-deductible. When you withdraw from the account during retirement, the amount you take out will be subject to taxes.
For a Roth IRA, you’ll make account contributions with money you’ve already paid taxes on. When you take withdrawals in retirement, those funds won’t be subject to additional taxes.
Taxes play a key role when deciding between a traditional spousal IRA or a Roth spousal IRA. “If you are making your spousal IRA contribution to a traditional IRA, the household can get an income-tax deduction,” Smith said. Future withdrawals will be subject to income taxes. “If you are making your spousal IRA contribution to a Roth IRA, you get no tax deduction, but future qualifying withdrawals will be 100% tax-free,” Smith said.
Before deciding, consider your household’s current tax situation and future tax estimates. A traditional spousal IRA might be a better option if you plan to be in a lower tax bracket during retirement. The Roth spousal IRA could be a good fit if you expect to be in a higher tax bracket later.
[Read: What Is a SEP IRA?]
How to Contribute to a Spousal IRA
After opening a spousal IRA, you can make contributions up to the IRS annual limit. The funds may be transferred automatically every month from your bank account or you may opt to make a lump-sum contribution once a year. “The contribution must be made with cash,” Centeno said. You can save in a traditional spousal IRA until age 70 1/2. Contributions can be made for a spousal Roth IRA as long as you are earning wages.
More from U.S. News
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Ways to Save for Retirement Without a 401(k)
How to Qualify for the Retirement Saver’s Match
How to Make Spousal IRA Contributions originally appeared on usnews.com
Update 08/27/24: This story was published at an earlier date and has been updated with new information.
