An individual retirement account or IRA is a good way to build a solid foundation of retirement savings in place of or in addition to an employer’s plan. There’s just one catch: The IRS requires you to have earned compensation to contribute to an IRA. There is, however, a loophole of sorts for married couples. When one spouse works but the other doesn’t, the working spouse can contribute to an IRA for him/herself and a spousal IRA for their better half. Keep reading to learn what the rules are for making spousal IRA contributions and why doing so makes sense if planning for a secure retirement is one of your goals.
Spousal IRA: Who Can Contribute?
To set up a spousal IRA, couples must be married and file a joint return. There’s no age restriction for making contributions to a spousal Roth IRA. If you’re setting up a Traditional IRA for your spouse, however, he or she must be under age 70½.
By the way: Like your own IRA, which is under your name, the new spousal IRA will be under your spouse’s name. There’s no such thing as a joint IRA.
Contribution Limits and Deductibility
Generally, the annual contribution limit for a Traditional or Roth IRA is $5,500, or $6,500 if you’re age 50 or older. The IRS uses a slightly different calculation for spousal IRAs. To contribute the full amount, you need to have at least that much in compensation for the year. In other words, if you want to save $5,500 in a traditional IRA for yourself and the same amount for your spouse, you’d need to earn $11,000 or more for the year.
If you’re saving in a Roth IRA, the amount you can contribute is limited by your income. For 2017, you can save up to the full contribution limit if your modified adjusted gross income isn’t more than $186,000. If it’s more than $186,000 but less than $196,000, you can contribute a reduced amount. Anything over $196,000 means you wouldn’t be eligible to save in a Roth for yourself or your spouse.
Traditional IRAs don’t limit you in terms of income, which makes them attractive if you’re a higher earner. Another plus with a Traditional IRA is the ability to deduct some or all of your contributions each year. (Roth IRA contributions aren’t tax-deductible.) Whether you can claim a deduction for your individual and spousal IRA contributions hinges on your income and whether you’re covered by an employer’s retirement plan.
If you’re not covered under a plan at work, you can deduct up to the full amount of your contribution limit. If you’re enrolled in a 401(k) or a similar plan, your deduction depends on your income. You can take the full deduction, up to the amount of your contribution limit, if your MAGI is $99,000 or less. You can claim a partial deduction if you make more than $99,000 but less than $119,000. The deduction phases out for earners who make more than $119,000.
Why Open a Spousal IRA?
The most obvious benefit of opening a spousal IRA is the ability to double your retirement savings. Consider this: If you save $5,500 in a traditional IRA from age 30 to age 65 and earn a 7 percent annual return each year, you’d have just over $813,000 saved by the time you retire. If you contribute that same amount on behalf of your spouse, however, your joint savings would grow to more than $1.6 million. That’s certainly helpful if you don’t have access to a retirement plan at work.
With a Traditional IRA, you also have the option of doubling up on deductions for those contributions. If you’re eligible to claim the full deduction each year, that could result in a lower tax bill if you normally owe, or a larger refund if you typically get money back from Uncle Sam.
If you’re ready to open a spousal IRA, an online broker can help you get started. As you’re comparing brokers, check to see whether there’s a minimum amount required to create an account. Also, look at the fees you’ll pay and your choice of investments. Once you find a broker that suits your needs, you can move on to setting up your spousal IRA and making contributions.