What is a spousal IRA and how does it work?

Can you contribute to your wife’s IRA if she doesn’t work? Are you in a situation where you work but your spouse does not work and wondering if your spouse can contribute to an IRA? If your spouse is unemployed, she can still make contributions to an IRA even if she does not earn income. This is possible through a spousal IRA. With a spousal IRA, you open the account for your nonworking spouse and make contributions on their behalf. Contribution limits to a spousal IRA are similar to a regular IRA and for 2024, you can contribute up to $7,000 or $8,000 if your spouse is 50 or older. For 2023, the maximum contribution limits to a spousal IRA are $6,500 or $7,500 if your spouse is 50 or older.

To make contributions to a spousal IRA, your spouse must be unemployed and you must be married and filing a joint tax return.

For more details on what a spousal IRA is and how to open and manage one, keep reading.

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What is a spousal IRA and how does it work?

A spousal IRA is a retirement account that allows a working person to contribute to his/her non-working spouse. You must be married and filing jointly to make contributions. In addition, your spouse must be unemployed or earning little wages.

The spousal IRA is similar to a regular individual retirement account (Roth IRA or a Traditional IRA). The only difference is that contributions to this account will be made by a working person and the account will belong to a non-working spouse.

If you work and your spouse does not work, you can still contribute to your spousal IRA. The same applies to your spouse. Even if your spouse makes little to no money, contributions to their accounts can still be made.

A spousal IRA allows you to maximize your retirement savings and build your net worth fast. For example, you can max out your 401(k) plan, your IRA, and your spousal IRA at the same time. Any funds you contribute to your spousal IRA become extra retirement savings to grow your wealth faster.

How to open a spousal IRA?

Opening a spousal IRA is straightforward and you can easily open one from your local bank, credit union, or an online investment company such as a brokerage firm.

Here are the key steps to opening a spousal IRA.

1. Check your eligibility

Ensure you’re eligible to open a spousal IRA. The IRS requires that you’re legally married and file a joint tax return. Additionally, the working spouse must have earned income that meets or exceeds the total IRA contributions.

2. Choose the right type of IRA

Your next step is to decide on the type of spousal IRA you want. You can choose between a traditional IRA or a Roth IRA. For the traditional IRA, your contributions may be tax-deductible, and withdrawals are taxed. For the Roth IRA, on the other hand, your contributions are after-tax, and growth and withdrawals are tax-free.

3. Choose a financial institution/ broker

Choose a financial institution or brokerage to open your IRA account. Look for one that offers low fees, a wide range of investment options such as stocks, bonds, ETFs, mutual funds, etc, and excellent customer service.

4. Complete the application.

Fill in the application form provided by the broker. The application typically includes information about you and your spouse, such as names, social security numbers, contact info, and employment details. You can also complete the entire application online which is convenient if you have a busy schedule.

5. Link your bank account to the spousal IRA

After creating the spousal IRA, you will need to link your bank account to the IRA. This allows you to make regular contributions directly from your bank account to your spouse’s IRA. Depending on the institution, the process may take a few business days to verify your bank account.

6. Make contributions

Once your account is open and have linked your bank account to it, you can then start making contributions. The amount can range from a small initial deposit to up to the annual limit set by the IRS.

7. Choose your Investments

Choosing your investments is the fun part. After making the initial deposit, select how you want to invest the money. This will largely depend on your risk tolerance and investment horizon. Here are 5 types of investment portfolios based on your risk tolerance. Most financial institutions also come with pre-mixed funds which to choose from.

You can also buy Target Date Funds(TDFs) which are investments made of stocks, bonds, and other securities to help you prepare for retirement. The younger you are, the more percentage of stocks they include which comes with higher risks but also above average return on investment.

8. Make contributions regularly

The best way to save for retirement and invest your money is to make regular contributions and keep buying investments as the money becomes available. To boost your retirement savings, make contributing to your IRA a regular habit.

9. Monitor your account

Regularly review your account to make sure it aligns with your long-term financial goals and adjust your investments as needed. For example, if you want to grow your account faster, you can reduce the percentage of fixed-income assets you are holding and buy more equities.

Contribution limits to a spousal IRA in 2024

Knowing how much you can contribute to a retirement account is an essential step in maximizing your retirement savings. The spousal IRA comes with contribution limits as well and they are the same as a normal IRA.

According to the IRS, the contribution limit you can make to an IRA in 2024 is $7,000 or $8,000 if you are 50 or older. For 2023, the maximum contribution limits to an IRA are $6,500 or $7,500 if you are 50 or older.

This means that your contributions to a spousal IRA cannot exceed these limits. In addition, the total contribution to your account and spousal IRA cannot be more than twice the limit for each individual. For example, if you max out your IRA and your spousal IRA, the maximum you can contribute to both IRAs is $14,000 in 2024 and $13,000 in 2023. If you and your spouse are 50 or older, you can contribute up to $16,000 in 2024 and $15,000 in 2023 to both IRAs.

In addition, if your income is lower than the total contribution allowed for both of you, your maximum contribution to both accounts cannot exceed your combined income. For example, if your income is $8,000 and your spouse made $0 for the year; your maximum contribution for both accounts cannot exceed $8,000.

What is the spousal IRA eligibility?

Before you start diverting some of your wages to a spousal IRA, you must understand that there are requirements for this account.

To qualify for a spousal IRA contributions, the following conditions must be met:

You are legally married
You are filing jointly on your tax returns
The spouse is unemployed or earning a small income, and
You cannot contribute more than the allowed limits or your combined income whichever is smaller.

Without meeting these requirements, your spousal IRA contributions will not be allowed.

What are the benefits of a spousal IRA?

Retirement saving is all about taking advantage of tax benefits that come with retirement plans. Let’s assume that you are the only one working in your household. So, you contributed to the limit allowed by the IRS on your accounts. If you don’t make any extra retirement savings, you will not be taking full advantage of the retirement benefits available at your disposal.

This is because you can still open a spousal IRA for your spouse which will allow you to stash away extra cash toward your retirement.

What are the benefits of a spousal IRA?

A spousal IRA will increase your investment capital. By putting your money into a retirement account, you will have more money to invest. The more money you have invested, the higher the return on investment (ROI) you can expect from the account.

A spousal IRA will reduce your taxable income. If you contribute to a spousal traditional IRA, the money you contribute may be tax-deductible assuming that you meet the IRS income limits. That is the contributions to a spousal IRA might lower your tax liability for the year you made contributions. If you are in a higher tax bracket, for example, you could end up in a lower tax bracket from making contributions.

A spousal IRA allows you to maximize your retirement savings. Any extra money you contribute to the account helps you maximize your retirement savings and build your net worth faster.

Is an IRA the same as a spousal IRA?

An IRA and a spousal IRA are not the same. While both are tools for saving for retirement, they are designed to accommodate different financial circumstances and income situations.

An IRA is a retirement savings account that an individual establishes with a financial institution for themselves. It allows the owner of the account to save for retirement with tax-free growth or on a tax-deferred basis.

On the other hand, a spousal IRA is specifically designed for a married person who may not have earned income to contribute to their own IRA. It allows a working spouse to make contributions to a nonworking spouse’s retirement account. This helps the nonworking spouse to build up savings for retirement.

Who owns a spousal IRA?

A spousal IRA is owned by the spouse for whom the IRA was established. This type of retirement savings account is typically set up by a working spouse for a non-working spouse under certain income limits. While contributions are made by the working spouse, the account is in the name of the non-working spouse, making them the owner of the spousal IRA.

How do spousal IRA contributions work?

A spousal IRA is owned by the spouse for whom the account is established. Even though the other spouse may contribute funds to it, the ownership of the account remains with the individual it was opened for. This individual has the sole authority to make investment decisions and withdraw from the account. Usually, the working spouse makes contributions on behalf of his/her spouse. However, the owner of the account can decide what to invest in, how much to invest, or when to make withdrawals.

Contributions to a spousal IRA cannot exceed the limits allowed for an IRA. That is if your spouse makes contributions to a spousal IRA, the maximum contributions should not exceed the limits established the the IRS for that year.

Can I contribute to my wife’s IRA if she doesn’t work?

Yes, you can contribute to your wife’s IRA even if she doesn’t work. This is referred to as a spousal IRA. As long as you are earning income, you can contribute to a spousal IRA on behalf of a non-working spouse. The contribution limit is the same as a traditional or Roth IRA. However, there are some income restrictions to be aware of. For this reason, it is a good idea to consult with a financial advisor or do some thorough research to understand the specifics of your financial situation.