What is a Spousal IRA?

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A Spousal Individual Retirement Account (IRA) is a special type of IRA that is designed to benefit a non-working spouse and allows a married couple to each have an IRA to help fund their retirement.

Internal Revenue Service rules require that you earn taxable compensation from work in order to have an IRA. The IRS defines “compensation” as income generated from a wage, salary, commission or self-employment. It also counts alimony, separate maintenance and tax-exempt military combat pay as compensation.

According to the U.S. Internal Revenue Service, “If you file a joint return, you may be able to contribute to an IRA even if you did not have taxable compensation as long as your spouse did. The amount of your combined contributions can't be more than the taxable compensation reported on your joint return.”

Related >> IRS guide to IRAs

What are the rules for a Spousal IRA?

The basic criteria for setting up a spousal IRA is that the married couple has to be filing jointly and has to have enough earned income to cover both the working spouse's own IRA contribution and the spousal IRA contribution on behalf of the non-working spouse.

For 2016, that equals $5,500 of earned income for each spouse, plus an additional $1,000 for each spouse who is 50 or older as of the end of the tax year. It can be a regular IRA or a Roth IRA, and once created, it operates exactly as either of those does.

Related >> What is a Roth IRA? A Short and Simple Guides

While the account can only be set up by a married couple, once the spousal IRA is created, it belongs solely to that individual, just as a regular IRA belongs to its funder. The spouse's Social Security or tax identification number is attached to the account, and the spouse has authority over investing and withdrawal decisions.

You cannot make any contribution to an IRA if your income consists entirely of unearned taxable income from sources, such as rental property, interest and dividends, pensions or annuities.

Related >> 11 Things You May Not Know About Retirement Accounts

Benefits of a Spousal IRA

If one partner has earned income and the other does not, then a Spousal IRA makes good retirement planning sense.

One tax benefit to the spousal IRA is if you do not participate in an employer-sponsored retirement plan, such as a 401(k), you will be able to deduct the full amount of your spousal IRA contribution from your taxes. If you do participate in an employer-sponsored plan, your ability to deduct your spousal IRA contribution depends on your income and your tax filing status.

A spousal IRA is likely a good idea for any married couple with one non-employed partner. Knowing if you can handle the contributions based on your household expenses, other budgetary restraints, and your overall income, is a decision you need to make. Consulting a certified financial planner or tax advisor is always a good idea if you are unsure.

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GJ
GJ
3 years ago

My husband and I both worked full time and each had 401ks and Roth IRAs until two years ago. I stopped working to raise our two kids but it never crossed my mind I *couldn’t* contribute to my IRA. Is that accurate?

Katie Ryan O'Connor
3 years ago
Reply to  GJ

Hi! This is a fantastic question. The answer is you need “earned income” in order to contribute to an IRA or the earned income of a spouse, so likely your continued contributions were covered in this way. If you did not have a spouse, say, and were also staying at home, there are other types of earned income. Those include alimony, some fellowships/scholarships, and some forms of stock options if that’s your sole income.

Sonja B.
Sonja B.
3 years ago

You will only be able to deduct the spousal IRA contribution amount from your income for tax-purposes if it is a traditional IRA, not a Roth. https://www.fool.com/investing/general/2015/07/16/spousal-ira-rules-for-couples-in-2015.aspx

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