Spousal IRAs: Retirement Savings for Single-Income Households Explained

In single-income households, where one spouse works and the other doesn’t, saving for retirement can present unique challenges. However, the IRS offers a powerful tool to help these families build a more secure financial future: the spousal IRA. This provision allows a working spouse to contribute to a retirement account for their non-working or lower-earning spouse, effectively doubling their potential tax-advantaged retirement savings. Understanding the rules surrounding spousal IRAs is crucial for single-income families seeking to maximize their retirement preparedness.

The cornerstone of a spousal IRA is that it’s based on the earned income of the working spouse. Even if one spouse has no income, or significantly less income, they can still have an IRA as long as they are married and file jointly, and their spouse has sufficient earned income to cover both their own IRA contributions and the spousal IRA contributions. “Earned income” typically includes wages, salaries, tips, and self-employment income. It’s important to note that investment income, pensions, or Social Security benefits do not qualify as earned income for this purpose.

Eligibility for a spousal IRA hinges on a few key factors. Firstly, the couple must be legally married at the end of the tax year and file a joint tax return. Secondly, the working spouse must have earned income exceeding the total contributions made to both their own IRA and the spousal IRA. For example, if the contribution limit for the year is $6,500 (as it is in 2023 for those under 50), and a working spouse wants to contribute the maximum to both their own IRA and a spousal IRA, they must have earned income of at least $13,000. The non-working spouse, on the other hand, does not need to have any earned income to be eligible for a spousal IRA. There are no age restrictions for contributing to a spousal IRA, as long as both spouses meet the general IRA eligibility requirements.

Contribution limits for spousal IRAs are the same as for traditional IRAs. For individuals under age 50, the maximum contribution is typically a set dollar amount which can change annually. For those age 50 and older, there’s often an additional “catch-up” contribution allowed. Crucially, in a spousal IRA scenario, these limits apply per spouse. This means that a single-income household can effectively contribute up to twice the individual IRA limit each year, split between the working spouse’s IRA and the spousal IRA for the non-working spouse. This significantly accelerates retirement savings compared to a single individual IRA.

Just like individual IRAs, spousal IRAs can be either Traditional or Roth. A Traditional Spousal IRA offers tax-deductible contributions, meaning you may be able to deduct your contributions from your taxable income in the year you make them. However, withdrawals in retirement are taxed as ordinary income. Conversely, a Roth Spousal IRA does not offer upfront tax deductions. Instead, contributions are made with after-tax dollars, but qualified withdrawals in retirement, including both contributions and earnings, are entirely tax-free. The choice between Traditional and Roth depends on a household’s current and expected future tax situation. If you anticipate being in a higher tax bracket in retirement than you are currently, a Roth Spousal IRA might be more beneficial. If you are in a higher tax bracket now, a Traditional Spousal IRA could provide immediate tax relief.

Withdrawal rules for spousal IRAs are generally the same as for individual IRAs. Withdrawals before age 59 1/2 are typically subject to a 10% penalty, in addition to regular income taxes for Traditional IRAs. However, there are exceptions to this penalty, such as for qualified higher education expenses, first-time home purchases (up to a lifetime limit), and certain medical expenses. After age 59 1/2, withdrawals are generally penalty-free, although Traditional IRA withdrawals are still taxed as ordinary income. Roth IRA qualified withdrawals in retirement are tax-free, provided certain conditions are met, such as holding the account for at least five years.

In conclusion, spousal IRAs are an invaluable retirement savings tool specifically designed for single-income households. They allow non-working or lower-earning spouses to build their own retirement nest egg, even without personal earned income. By leveraging the working spouse’s income to fund both IRAs, families can significantly boost their combined retirement savings potential, benefit from tax advantages, and secure a more comfortable financial future together. Understanding the eligibility rules, contribution limits, and the differences between Traditional and Roth spousal IRAs is the first step towards taking full advantage of this powerful retirement planning strategy.