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You may have assumed that individual retirement accounts (IRAs), like 401(k)s, are only available to employed people. That's only half true, however: An unemployed person can have and fund an IRA if they're married to someone who's employed and the two of them file a joint tax return. It's called a spousal IRA, and you may have good reason to take advantage of one if you're eligible.
Spousal IRAs: The Basics
Contribution limits for spousal IRAs are the same as for regular IRAs. For 2021, that's $6,000 per account, or $7,000 if you're age 50 or older.
You need to file a joint tax return to fund a spousal IRA. If the nonworking spouse filed a separate return, that spouse would be ineligible to make a contribution, since IRA contribution amounts can't exceed the taxpayer's earned income. Total contributions to both spouses' IRAs also cannot exceed the couple's earned income (meaning investment earnings cannot be applied to the contribution limit). Although the spousal IRA is funded from the working spouse's income, it's still owned and controlled by the nonworking spouse.
The deadline for making IRA contributions — spousal or otherwise — in a given year is the deadline for filing tax returns, in April.
Why Start a Spousal IRA?
One reason to start a spousal IRA is to help maximize the amount of dollars you can set aside for retirement on a tax-favored basis. As the contribution limits depend on joint tax filing, they may be higher for you, depending on your and your spouse's individual and household incomes.
In the case of a traditional IRA, you can postpone tax payments until retirement. With a Roth IRA, while you can't take a tax deduction for the contributions you make to that account, you won't be taxed on any of the funds you withdraw at retirement as long as the funds meet both the Roth and IRA requirements. This is because you pay taxes on each contribution you make. Having these options available can help provide additional flexibility for your spousal IRA.
Contribution vs. Deduction Limits
As with regular IRAs, keep in mind there's a difference between contribution limits and deduction limits (i.e., the tax deductibility of traditional IRA contributions) for a spousal IRA. Limits on tax deductions for a spousal IRA contribution depend on your modified adjusted gross income (MAGI) and whether you're covered by a retirement plan through your employer.
Your MAGI is your gross income, minus certain deductions you might have taken, plus any tax-exempt interest earnings. If the working spouse isn't covered by a retirement plan at work, there's no MAGI-based limit on the deductibility of traditional IRA contributions.
For 2021, if you're covered by a retirement plan at work and the MAGI reported on your joint tax return is no more than $104,000, you can deduct the full amount of your spousal and other non-Roth IRA contributions. That deductibility begins to phase out between $104,000 and $124,000, and is not available if your MAGI exceeds $124,000.
Roth IRA contributions — including spousal Roth IRAs — aren't deductible, because you pay those taxes up front.
Timing Matters
Starting a spousal IRA sooner rather than later might be beneficial. First, as with all other forms of long-term saving, the sooner you start, the more you may be able to take advantage of compounding interest and earn additional investment returns on your contributions. (That's assuming those contributions grow, however — no investment is guaranteed to earn value, and may instead lose value depending on market activity and other factors.)
Secondly, tax laws change. The opportunity to build on what you as a couple with one nonworking member can set aside in an IRA could diminish in the future. Or contribution limits could be reduced. Or rising income could affect your eligibility for some tax benefits. But it's much more unlikely that any future tax-law changes impacting IRAs would affect what you've already done to help maximize your IRA contributions under today's rules.
Whatever IRA type you choose to open, taxes will still affect your retirement income by subtracting from your withdrawals. But by using a spousal IRA to leverage the best tax-payment strategy for you — whether that be to defer or to pay now — you can at least help reduce the taxes you pay and enjoy more after-tax income in retirement.
