Should You Consider a Spousal IRA?

September 14, 2022
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Whether you’ve joined the Great Resignation or are just a stay-at-home spouse with no tax-defined income, you can still set up and contribute to a retirement account. Traditional and Roth IRAs offer excellent tax-advantaged savings opportunities as you prepare for your retirement years.

What is a Spousal IRA?

An IRA set up to receive contributions from a non-working spouse is known as a “Spousal IRA.” It allows you to contribute to a retirement savings/investment account. You can either defer your taxes until they are later withdrawn after the age of 65 (traditional IRA) or you can pay taxes on your contributions now and withdraw them tax-free once you are of age (Roth IRA). In addition, the working spouse will be able to make contributions to this account.

Non-Working Spouse: Traditional Spousal IRA Contributions

For the 2022 tax year, you (the non-working spouse) can make deductible contributions up to $6,000 to a traditional spousal IRA set up in your name. If you are over the age of 50 as of December 31, 2022, this limit is raised to $7,000. These limits may change starting in 2023.

To make a traditional spousal IRA contribution, you must file a joint Form 1040. You and your spouse must have earned income together—typically from your working spouse. The total must at least equal the sum of your contribution plus your spouse’s contribution, if any.

Please note that taxable alimony received by you or your spouse under a pre-2019 divorce agreement counts as earned income for IRA contribution eligibility purposes.

If your working spouse is already covered by a tax-advantaged retirement plan—via job or self-employment—the deductibility of your traditional spousal IRA contribution is phased out. For the 2022 tax year, this happens between a joint adjusted gross income AGI) or $204,000 and $214,000. Joint AGI is the sum of the most taxable income items and gains, reduced by above-the-line deductions. These include:

  • Deduction for contributions to a self-employed SEP, SIMPLE or other self-employed retirement plan
  • Deduction for 50% of self-employment tax
  • Deduction for self-employed health insurance premiums
  • Contributions to a health savings account (HSA)
  • Alimony payments required by a pre-2019 divorce agreement
  • Deduction for up to $250 of unreimbursed expenses for K-12 educators
  • Deduction of moving expenses for eligible members of the armed forces

If your working spouse is not covered by a tax-favored retirement plan, you (the non-working spouse) can make a deductible traditional IRA contribution regardless of how high your joint AGI might be.

Working Spouse: Traditional IRA Contributions

If neither you nor your working spouse participate in a tax-favored retirement plan—via job or self-employment—your working spouse can make a deductible contribution of up to $6,000 for the 2022 tax year ($7,000 if over 50 by December 31, 2022). You, the non-working spouse, can make a deductible contribution to a traditional spousal IRA set up in your name, subject to the same limits.

To qualify, you and your spouse together must have enough earned income to at least match the combined amount of your contributions. All the requisite earned income can come from your working spouse (including any taxable alimony payments received).

On the other hand, if your working spouse participates in a tax-favored retirement plan, his or her ability to make a deductible traditional IRA contribution for the 2022 tax year is phased out between a joint AGI of $109,000 and $129,000.

Setting up a spousal IRA can be a great option to set aside retirement funds for a non-working spouse. However, the rules and limits can be rather complicated. To learn more about spousal IRAs and other retirement planning solutions, contact Illumination Wealth today. Talk with one of our knowledgeable financial advisors and find the right retirement savings plan for you and your family.