For much of American history, most households were single income families—dad went to work and mom stayed home keeping house and raising the kids (a full-time job by itself). That began to change in the late 1960s when women began entering the labor force in greater numbers. The number of working women continued to grow until 2020 when two-thirds of families were dual-income households and only 34% single income.
Covid caused the number of two-income households to shrink somewhat, especially among younger families. They discovered that their lifestyle was almost identical on a single income once they removed the high cost of child care from their budget, so some moms decided not to go back to work. But with just one income, the stay-at-home spouse lost the opportunity to contribute to an employer-sponsored retirement plan. That’s where a spousal IRA can help.
Typically, you need earned income to contribute to an IRA, but a spousal IRA relaxes that requirement and gives a husband or wife with low or no annual wages a way to save tax-efficiently for the future.
A spousal IRA offers similar advantages to other retirement accounts but with some important differences. Workplace retirement plans like 401(k)s, 403(b)s, and others are only offered by employers. If you don’t work for an organization that offers such a plan, you can’t use one.
An IRA, on the other hand, allows people with taxable income — or people whose spouses have taxable income — to save for retirement regardless of access to workplace retirement plans.
Spousal IRA Rules
- A couple must file a joint tax return (married filing jointly) to meet the criteria for a spousal IRA.
- Total contributions to both your IRA and your spouse’s IRA may not exceed your joint taxable income or the annual contribution limit on IRAs times two, whichever is less. It doesn’t matter which spouse earned the income. For example, if the working spouse can contribute $10,000 to an IRA, $10,000 can also be contributed to a spousal IRA.
- Each spouse that is 50 years old or older can contribute an extra $1,000 annually as a catch-up contribution.
- A spousal IRA is not a joint IRA. It is an individual account in the name of the non-working spouse.
- The spousal IRA can be either a traditional IRA with pre-tax contributions or a Roth IRA with contributions made on an after-tax basis.
- There is no age limit on contributing to either a traditional or a Roth spousal IRA. As long as there is earned income for the household, you can still contribute.
- Non-working spouses contributing to IRAs are subject to the same age and withdrawal restrictions as working spouses.
- Generally, withdrawals made before age 59 ½ will be subject to an early withdrawal penalty on top of any income taxes owed.
- Depending on the type of IRA you have, you may also be subject to required minimum distributions (RMDs). The IRS requires that you start taking taxable withdrawals at age 73. RMDs are only required for pre-tax accounts like traditional IRAs. You won’t have to take RMDs from a Roth IRA.
You can find more information in IRS Publication 590-A.
This information is presented for informational purposes only and does not constitute an offer to sell, or the solicitation of an offer to buy any investment products. None of the information herein constitutes an investment recommendation, investment advice or an investment outlook. The opinions and conclusions contained in this report are those of the individual expressing those opinions. This information is non-tailored, non-specific information presented without regard for individual investment preferences or risk parameters. Some investments are not suitable for all investors, all investments entail risk and there can be no assurance that any investment strategy will be successful. This information is based on sources believed to be reliable and Alhambra is not responsible for errors, inaccuracies, or omissions of information. For more information contact Alhambra Investment Partners at 1-888-777-0970 or email us at [email protected].
