If you have a job but your spouse doesn’t work, a spousal IRA will allow both of you to make contributions to your IRAs. A nonworking spouse cannot make contributions to a regular IRA since they will not have eligible compensation. If one spouse has an income, however, the working spouse can open a spousal IRA and make contributions on behalf of the nonworking spouse.
A spousal IRA allows you to make bigger contributions to your retirement plans and grow your nest egg faster.
Here is what you need to know about opening a spousal IRA, eligibility to make contributions, and how much you can contribute.
What is a spousal IRA?
A Spousal IRA is a special type of Individual Retirement Account (IRA) that allows a working spouse to contribute to a non-working spouse’s retirement savings. This IRA offers the same potential tax advantages as a regular IRA. The primary goal of a spousal IRA is to maximize the couple’s retirement savings, even if only one spouse is currently earning an eligible income. You can open either a spousal Roth IRA or a traditional IRA. Contribution limits to a spousal IRA are similar to a regular IRA which are $7,000 in 2024 if you are under 50 and $8,000 if you are 50 years old and above.
Read more: What is a spousal IRA and how does it work?
Spousal IRA eligibility requirements
Being married does not mean you are qualified to open a spousal IRA. According to the Internal Revenue Service (IRS), the following are eligibility requirements to open a spousal IRA and make contributions.
- The working spouse must make eligible income. Typically, eligible compensations are those from wages, bonuses, commissions, tips, salary, or income from self-employment.
- You must be married and filing a joint tax return.
- Your total contributions to your IRA and spousal IRA cannot be higher than your joint taxable income or total contribution limits to both IRAs, whichever is less.
Learn more: Can I contribute to a spousal IRA for a non-working spouse?
How to open a spousal IRA?
If you are interested in opening a spousal IRA for your nonworking spouse, here is a step-by-step guide to opening the account.
1. Identify your financial needs
Before you open a spousal IRA and make contributions, you should know the reason you are opening it and how it will affect your finances. For example, making contributions to a spousal IRA can easily affect your ability to pay existing bills if you don’t have enough cash reserves.
2. Check your eligibility before you open a spousal IRA
To be eligible for a spousal IRA, you need to meet certain criteria. The following are eligibilities you need to meet before you can open a spousal IRA.
- You must be married and file a joint tax return with your spouse.
- Your spouse must have earned no income or a significantly low income. If you are opening a spousal IRA, you must have earned income for the year you want to make contributions. Moreover, the amount you can contribute to a spousal IRA is limited to the total earned income reported on your joint return or IRA contribution limits whichever is less.
3. Decide which IRA account you want to open
There are two types of IRA you can choose from which are the Roth IRA and traditional IRA. The IRA you open will mainly depend on your financial goals.
With a Roth IRA, you make contributions with after-tax money but you grow the account without paying taxes and make tax-free withdrawals. A Roth IRA is a good choice if you don’t want to pay taxes on your distributions during retirement especially when expecting a higher retirement income.
For the traditional IRA, on the other hand, your contributions may be tax deductible. Additionally, you grow the account on a tax-deferred basis and pay taxes when you are taking money out during retirement. The eligibility for deductions on a traditional IRA depends on your income, tax-filing status, and other benefits you have from your work such as a 401(k) plan.
4. Decide where to open a spousal IRA
After deciding on the type of IRA you want to open, the next step will be figuring out where to open the account. You can open a spousal IRA from your local bank or online financial institutions and brokerage firms such as Fidelity and Vanguard, BlackRock, Charles Schwab, etc. To get the most out of your spousal IRA, pick a custodian with lower account management fees.
5. Get your documents ready
When opening a spousal IRA, you will need to provide essential information about you and your spouse. The information most IRA providers ask for includes your name, spouse’s name, address, phone numbers, email addresses, marital status, social security numbers, etc.
6. Submit a spousal IRA application
Your next step is to submit a spousal IRA application. The application can easily be done online and the whole process can take about 20 to 30 minutes depending on the institution. Make sure that you have all the information necessary to make the process seamless.
7. Fund your spousal IRA
After creating a spousal IRA, you will need to link your bank account to the IRA. Your bank account allows you to make contributions to the IRA either manually or automatically, should you choose to do so. It usually takes a few business days for the institution to verify your bank account.
After your bank has been verified, it will be a perfect time to start making contributions to your spousal IRA. You can either make a lump sum contribution, schedule a recurring contribution, or manually make contributions whenever you want.
Tip: Ensure you’re aware of the current year’s contribution limits to avoid IRS penalties. For 2024, the maximum contribution to an IRA is $7,000 or $8,000 if your spouse is 50 or older. For 2023, the limits are $6,500 or $7,500 for those who are 50 or older.
8. Start investing your money
A spousal IRA means does not benefit you if the money in the account is not invested. The only way to grow your account and build wealth is by investing money inside the spousal IRA. Otherwise, your IRA will serve the same purpose as a savings account which does not earn you anything and you cannot even withdraw your money without paying a penalty.
You must decide on an investment strategy for your spousal IRA. Depending on your risk tolerance and time horizon, you may opt for a mix of bonds, stocks, mutual funds, or ETFs. You can also buy Target Date Funds(TDFs) to help plan for retirement.
9. Manage your account
Reviewing your account quarterly or annually can help ensure it aligns with your retirement saving goals. Continue to manage your spousal IRA as part of your overall retirement strategy and make adjustments when necessary. Take into account any changes in your financial situation, retirement goals, or tax laws that might impact your account.
For example, the IRS increases contribution limits to retirement plans over time in response to economic conditions. If you automatically make fixed contributions to your IRA, you might need to recalculate your contributions to take advantage of these changes.
Spousal IRA contribution limits: Roth IRA and traditional IRA
Contributions to a spousal IRA are the same as a regular IRA. For 2024, the contribution limits to an IRA are as follows:
- $7,000 if you are under 50 and $8,000 if you are 50 or older, or
- 100% of your eligible income if it is less than the IRA contribution limits. For example, if you made $6,000 in 2024, you can contribute 100% of your income to an IRA since it is lower than the maximum contribution allowed of $7,000.
For 2023, the IRA contribution limits are as follows:
- $6,500 if you are under 50 and $7,500 if you are 50 or older
- 100% of your eligible compensation if it is lower than the contribution limits to an IRA for 2023.
Read more: IRA contribution limits in 2024
Difference between Roth IRA and traditional IRA
A Roth IRA and a traditional IRA are two different types of retirement savings accounts with distinct features, advantages, and disadvantages. Here are the differences between a Roth IRA and a traditional IRA.
In a Roth IRA, contributions are made with after-tax dollars. This means you pay income taxes on contributions now, but in return, you enjoy tax-free withdrawals during retirement. Additionally, there are no required minimum distributions (RMDs) with a Roth IRA, which gives you more control over your retirement income. Importantly though, there are contribution income limits to participate in a Roth IRA.
A traditional IRA, on the other hand, provides a tax deduction for the tax year the contributions are made. The contributions then grow tax-deferred until the funds are withdrawn during retirement, at which point they are taxed at your current income tax rate. A key feature of traditional IRAs is the lack of income restrictions for contributions. However, unlike a Roth IRA, traditional IRAs enforce required minimum distributions (RMDs) once you reach a certain age. For 2024, RMDs are required when you turn 73.
Where to invest your spousal IRA funds?
The money in your spousal IRA can be invested in a wide range of investments inside your account. Typically, you would want to make a portfolio and invest based on your risk tolerance. Some investments to choose from include Mutual Funds, Index Funds, Exchange Traded Funds(ETFs), Bonds, Individual Stocks, and many more. Some IRAs also come with the option to put your funds in high-yield deposit accounts.
When to make contributions to a spousal IRA?
You are eligible to make contributions to a spousal IRA or any other IRA by the due date of your tax return filing date. Tax returns are due by April 15th each year. This means that your IRA contributions for the year you are filing taxes for must be mailed to your account trustee or deposited into the account by April 15th.
For example, contributions to your 2023 IRA must be deposited into the account by Monday, April 15th, 2024. The only exception applies when April 15th falls into the weekend. In this case, the deadline is extended to the next business day, according to IRS.
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