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Is the Spousal IRA the Secret IRA?

Spousal IRA for those married

Updated 08/30/2022

[All limits referenced in this article for Spousal IRAs are as of 2022, I will do my best to update them as the IRS changes them in future tax years. Please take a moment to review the website disclosure here if you haven’t yet already. This post is not investment or tax advice and is only educational in nature.]

Saving for Retirement

While dual-income households are the norm in the United States, that was not always the case. Historically, households relied on a man to be the single-income earner while the wife was a homemaker. These archaic days are gone, as is the prototypical definition of the American family. 

Households now vary dramatically in their composition within the United States, ushered in by a wave of progressive change, ever-evolving societal expectations, and economic forces. This new paradigm has given rise to the contemporary single-income household, ranging from partially retired couples – one spouse works while the other is retired – to stay-at-home dads. 

The combinations are nearly endless for these single-income households, and the reasons vary.

However, one thing has remained constant, and that is the need for retirement income. With the evaporation of the pension, this income has primarily become the responsibility of the American household for most homes. But, for those single-income families, there are fewer tax-advantaged saving opportunities since only one spouse can save in a 401(k).

To make matters worse, IRAs require earned income to contribute – or do they?

Enter the Spousal IRA

Saving in a qualified retirement account requires earned income. However, if you are a non-working spouse, the IRS allows you to contribute to a Spousal IRA if your partner has an earned income. 

Thus the earned income requirement is lifted for non-working spouses, raising the limits on what a family can save in a tax-advantaged way. (Thanks Kay Bailey Hutchison, a key sponsor of the 2013 legislation that codified rules around this account!)

What are the rules for a spousal IRA?

A spousal IRA is no different than a regular IRA; in fact, you open a traditional or Roth IRA to contribute to and start investing. All that matters is that your spouse earns income, and you place money into the account.

[If you already have an existing IRA, you can use that account.]

Like regular IRA contributions, income limits govern the deductibility of traditional contributions or determine Roth eligibility for Spousal IRAs.

If your spouse earns above $204,000 a year, you are limited or disqualified from making a Roth spousal contribution in 2022. 

If your spouse does not have a 401(k) plan offered by their employer, then you can always make a deductible traditional spousal IRA contribution. 

However, if they are offered a 401(k) plan, you can only make a deductible contribution if they make up to $109,000 as of 2022. If this happens to be your household, you can still contribute but are limited to after-tax IRA contributions.

[This article offers a quick introduction to the subject of after-tax IRA contributions]

If your household is restricted from Roth contributions and can only make after-tax IRA contributions, you may be wondering if you can make a spousal backdoor Roth IRA contribution. The answer is yes!

[This article offers a quick introduction to the subject of backdoor Roth conversions.

Additionally, just as standard IRAs have $6,000 per year limits, plus $1,000 catch-up contributions for those 50+, spousal IRAs have the same limitations. Importantly, if your household contributes $14,000 to IRAs in 2022 – $6,000 and $1,000 each – your family MUST have $14,000 of earned income. You cannot contribute more to IRAs than your household makes, period.

In Closing

The Spousal IRA is what I refer to as the Secret IRA. Often unknown to single-income households, this account offers unique benefits to help you achieve your family’s retirement goals. While saving for retirement is often more limited when only one income exists, your account choices don’t have to be with IRAs. So, save away!

Have you ever made a spousal IRA contribution, or have you ever heard of them? Let me know in the comments below, and as always, have a great day!

Mile High Finance Guy

finance demystified, one mountain at a time

mile high finance guy

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