Spousal IRA: What It Is And How To Use It

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Spousal IRAs are used by married couples to save money for retirement. A spousal IRA is a type of IRA that permits a non-working spouse to contribute to a traditional or Roth IRA.

Each spouse owns an individual retirement account. Spouses can open these accounts separately or together. Spouses can also contribute to these accounts as individuals.

How do spousal IRAs work?

There is technically no retirement account called a spousal IRA. A spousal IRA is just an IRA, but you’re using it because you’re married.

Normally, you can only contribute to an IRA if you have earned income. If only one spouse is working, that would mean the non-working spouse couldn’t contribute to an IRA. With the spousal IRA rules, the non-working spouse can use their spouse’s taxable compensation to qualify to contribute to an IRA.

The other IRA contribution limits and rules apply as normal.

What are the benefits of a spousal IRA?

A spousal IRA is a separate account set up in the non-working spouse’s name. Once a contribution is made to the IRA, it belongs entirely the person who owns it and not the person who makes the contribution.

As a couple, you can double your household contributions to an IRAs versus if only the working spouse could contribute to an IRA. If you make deductible contributions, this can also double your tax deductions.

What are the deductions for spousal IRAs?

Traditional IRA tax deductions are the same for spousal IRAs. Spouses can deduct the full amount of IRA contributions if both spouses work and neither spouse is covered by an employer’s retirement plan. However, if one spouse is covered by an employee’s retirement plan, how much you can deduct depends on your Adjusted Gross Income.

What are the rules for Spousal IRAs?

Spouses can’t be joint owners of an IRA. Each spouse is the sole owner of the IRA in their name.

Asset allocation decisions belong to the spouse who owns an IRA. You can agree what assets to include in each account, but this agreement isn’t legally binding. For example, in a divorce, each spouse would just get their own IRA with no adjustments.

Withdrawals must be made by the owner of the IRA.

Married couples should file jointly if they want to make spousal IRA contributions or if they want to take advantage of any other benefits. A married couple filing separate returns won’t qualify for spousal IRA benefits.

What are the contribution limits for spousal IRAs?

Married couples may want to file jointly to maximize their retirement savings. Spouses can each contribute up to $7,000 per year to a traditional or Roth IRA. You can also split your contribution between both types of IRAs.

Spouses can contribute to IRAs for each other without limit. A working spouse can fund a spousally IRA even if the non-working spouse is older than 70 1/2 years.

Can a spouse leave their own IRA to their spouse?

Spouses should name each other as beneficiaries of their IRAs. You can then use the funds to set up your own retirement account. This allows you to avoid taxes on the transferred amount.

What are the penalties for excess spousal IRA contributions?

You may have made excess contributions to your IRA if you contributed over your annual IRA contribution limit or made an eligible rollover to an IRA (you must be age 59 ½ or older). In these cases, the IRS may impose a penalty of 6% of the total amount contributed plus interest. The penalty applies each year until you remove the excess contribution.

How do RMDs work with spousal IRAs?

Spouses must take required minimum distributions from their traditional IRAs when they reach 70 1/2 years old. RMDs are based on each individual spouse’s age for their own accounts.

What are the rules for converting a spousal IRA into a Roth IRA?

IRA conversions involve changing the account type to benefit from different tax breaks. It’s possible to convert a traditional IRA into a Roth IRA. A Roth conversion will trigger taxes because all the funds transfer from pre-tax traditional IRA into post-tax Roth IRA, but in some situations paying the taxes now can save you taxes in the future.

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