By Brian Swerdlow
Individual Retirement Accounts (IRAs) have long been a favorite tool of financial planners. Unfortunately, though, IRAs usually require that an individual earns income before they can contribute. However, there’s an exception to the requirement often overlooked by pre-retirees, called a spousal IRA. If you are married and building a retirement plan, you should take time to discover more about spousal IRAs. In this article, I’ll examine spousal IRAs, their purpose, benefits, and why you should consider having one in your retirement portfolio. We’ll look at the potential advantages and drawbacks of spousal IRAs to help you make an informed decision.
What is a Spousal IRA?
A spousal IRA is a unique retirement savings strategy that lets a working spouse save money in an Individual Retirement Account on behalf of their non-working or low-earning spouse. This provision offers a significant opportunity for couples to boost their retirement savings, even if one spouse does not have much income. Unlike standard IRAs, which require earned income to contribute, spousal IRAs overcome this limitation by permitting the working spouse to contribute on behalf of the non-working spouse.
How do spousal IRAs work?
Spousal IRAs are not a different type of IRA. They are traditional or Roth IRAs used by married couples. Each spouse maintains their individual IRA account, but the working spouse may contribute to both. The most critical requirement is that the working spouse’s needs to equal or exceed the total contributions to both IRAs. For instance, if a working wife earns $100,000 annually and her husband is not working, she can save up to the maximum allowable limit in her own traditional or Roth IRA and contribute to her husband’s IRA.
Why have a spousal IRA?
Setting up a spousal IRA has numerous advantages that may help you achieve retirement success. One obvious benefit of a spousal IRA is that you can potentially double the amount of money you’ve saved for retirement by contributing to two IRAs. This ability to “supercharge” your savings is why many couples choose to have a spousal IRA.
Of course, depending on the type of IRA selected (traditional or Roth), having a spousal IRA provides different tax advantages. If you choose a traditional IRA, you’ll grow your savings tax-deferred now. A Roth spousal IRA, on the other hand, provides you with tax-free withdrawals. Also, contributing to any qualified account, including a spousal IRA, could make you eligible for the “Saver’s Credit.” The Saver’s Credit is up to $2,000 for certain married taxpayers filing jointly. This credit further reduces your tax liability.
What are the potential pitfalls of spousal IRAs?
Although a spousal IRA may be an excellent option for couples who need to save more for retirement, it does require the working spouse to earn enough to cover both contributions. This provision might make a spousal IRA unfeasible for some couples.
Additionally, spousal IRAs must adhere to the IRS’ annual contribution limits. For 2023, the total contribution you can make to all your IRAs or Roth IRAS is $6,500 or $7,500 if you are 50 or older.
Finally, there is resistance by some couples to adding more complexity to their retirement plans by having a second IRA.
Each account must be monitored individually, and decisions must be made about which investments to choose. Many people have difficulty keeping up with one qualified account, much less two. Fortunately, having a qualified fiduciary retirement advisor can help you avoid making mistakes with your retirement accounts.
Summing it up:
In summary, a spousal IRA is a valuable opportunity for couples to maximize their retirement savings, even if one spouse earns little to no income. Couples can benefit from tax advantages, potential credits, and a more secure retirement future by taking advantage of this strategy. However, it’s crucial to consider the income requirements, contribution limits, and complications before deciding to fund a spousal IRA. To make the most of a spousal IRA, consult a financial advisor who can help tailor the strategy to your unique financial situation and retirement goals.
