The Spousal IRA: Everything You Need to Know
BrycenWhat Is a Spousal IRA?
A spousal IRA is like a regular IRA except that you don't have to meet certain requirements. In fact, contributions to a spousal IRA are fully deductible. You can contribute up to $55,000 per individual ($110,000 if married and filing jointly). And unlike a traditional IRA, you can make contributions even if you're under age 59½.
Contributions to a spousal account must come from one spouse. If both spouses work, each person can put in his or her own contribution. But if just one spouse works, the other cannot contribute.
The IRS allows people to transfer assets into a spousal IRA during marriage. This includes property acquired after the marriage. However, the amount transferred must be less than half of what the couple owns together. For example, if a husband and wife owned a home worth $200,000, the husband could transfer $100,000 into the account without having to pay taxes on it.
If the couple divorces, however, the ex-spouse can take back some of the money he or she donated to the IRA. So if the couple had $50,000 in the account, the former spouse could withdraw $25,000 and avoid paying taxes on it.
Key Takeaways
There are many ways to fund an Individual Retirement Account (IRA), including through employer plans, individual retirement annuities (IRAs), and 401(k)s. You can make contributions directly into an account or you can set up a plan where funds are automatically deposited each pay period. If you don't want to do it yourself, you can hire someone to help you manage your investments.
Contributions to IRAs can come from both employers and individuals. Employer contributions are usually deducted from workers' paychecks. Individuals can make voluntary contributions to their IRAs. These contributions must be under $5,500 per person ($6,500 if married filing jointly). However, there are some exceptions to this rule. For example, catchup contributions are allowed for people older than 50. Also, children younger than 18 can open an IRA if they work for wages and earn income. They can even make contributions themselves. Finally, parents can open an IRA for their minor child if he or she works for wages and earns income.
The amount of money you can put into an IRA depends on several factors. Your annual contribution limit is based on your age. People aged 70½ and older can contribute up to $1,000 per month.
How a Spousal IRA Works
A spousal IRA is similar to a traditional IRA except it is owned jointly by both spouses. If you're married, you can open one up now and make contributions each year. You'll still owe income taxes on what you put into the account, but you won't owe taxes on withdrawals. This makes sense because you wouldn't want to lose out on deductions just because you didn't pay taxes on the funds you contributed.
You can contribute $5,100 per year ($6,550 if age 50+) to a spousal IRA without paying taxes. Contributions are made before tax withholdings begin, so there's no penalties. There are some restrictions though. For example, you can't withdraw funds from a spousal IRA unless you've been divorced for 10 years or longer. You can't take distributions while you're still married. And you must file a joint return with your spouse to receive any benefits.
Spousal IRA Example
A married couple, Jessie and John, are both employed full-time. They live together with their three children. Their combined income totals $100,000 per year. Jessie earns $50,000 while John makes $50,000. Both spouses work for the same employer. Each spouse receives a traditional IRA contribution limit of $5,500 annually.
The IRS allows couples to combine their incomes for purposes of determining eligibility for a spousal IRAs. In this case, it is assumed that each spouse works 40 hours per week and therefore, each one gets half of his/her salary ($25,000). Therefore, the total annual income for the family is $125,000.
John now owns shares worth $10,250. He plans to sell the shares and use the proceeds to pay off some credit card debts. He sells the shares and uses the proceeds to pay off the credit cards.
Jessie is left with shares worth $4,750. She decides to keep the shares because she still owes $2,000 to her IRA. She doesn't plan to sell the shares anytime soon.
When the IRS determines that Jessie qualifies for a spousal IRA, she must include the value of the shares she gave her husband in her taxable income. Her tax liability is calculated based on the difference between the amount she contributed ($7,000) and the fair market value of the shares she received ($4,750).
If the shares had been purchased directly by John, he could exclude up to $1,000 of the cost of the shares from his gross income. However, since he sold the shares to Jessie, he is allowed to deduct only 50% of the cost of the stock.
Spousal IRA Rules
IRAs are great because they let couples save for retirement together. But there are some rules to follow. One of those rules is that spouses must file jointly or separately. If both people work, it makes sense to file jointly since they are contributing to one account. However, if just one person works, it doesn't make sense to file jointly. This is where the spousal IRA comes into play. A spousal IRA allows married couples to set aside money in a tax-advantaged way. There are many different types of spousal IRAs, including traditional, Roth, SEP, SIMPLE, etc.
The good news is that you can contribute up to $5600 per year ($6600 if you are 50+), but the IRS limits withdrawals to $5500 per calendar year. So if you want to take out more than that, you'll have to pay taxes.
Spousal IRA Tax Deductions
A spousal IRA is different from a traditional IRA because it allows you to make contributions to both spouses' accounts and gives you tax breaks for doing so. You cannot use a spousal IRA to save money for yourself, however.
You must file a joint federal return each year. If you do not, you could face penalties.
The IRS treats a spousal IRA as a traditional IRA. This means you can take deductions for contributions and earnings just like you would with a traditional IRA.
If you are married filing jointly, you can deduct up to $5,500 per person ($10,000 if you are over age 50). For example, if you contributed $2,400 to your spouse's account, you'd be able to deduct $4,100 ($2,400 times 2).
This deduction does not apply to amounts you contribute to your spouse's IRA if he or she is under age 59½.
Your adjusted gross income (AGI) limits the total amount you can deduct. AGI includes your taxable wages, interest, dividends, capital gains, alimony, child support, Social Security benefits, unemployment compensation, and some student loan payments.
In 2018, the AGI limit is $186,900 ($203,700 if you are over age 65).
For 2019, the AGI limit rises to $195,300 ($213,600 if you are over age 70), and it rises again to $214,200 ($235,800 if you are over age 75).
How to Set Up a Spousal IRA
A spousal IRA isn't really a joint account. It's just a separate account that you can use to save money for your future. But there are some rules about how it works. If your spouse wants to contribute to your retirement savings, they'll need to open their own individual retirement account (IRA). This way, they're able to make contributions without having to ask permission from you.
If you've been married less than 10 years, you might think that a spousal IRA is something you can set up together. However, that's not true. In fact, you can't even open one for your partner. Instead, they'll need to do it themselves. They'll need to fill out paperwork, pay taxes and fees, and keep track of what they put into the account. All of those things must happen separately.
You can still help your partner manage their investments though. For example, you could give them access to your brokerage account so they can invest directly from there. Or, you could let them use your credit card to buy shares online.
Advantages of a spousal IRA
A spousal IRA allows you to open an IRA without affecting your current tax situation. You can do it yourself or hire a financial advisor to set up the plan. If you are married, you can each make contributions into your own IRA accounts and receive matching funds from your spouse. This makes a spousal IRA great for couples who want to save money while growing their retirement savings.
Spouses can choose different types of investment options within the IRA. They can invest in stocks, bonds, mutual funds, exchange-traded funds (ETF), real estate, annuities, life insurance policies, and even collectibles like art and stamps. Each type of investment offers different benefits, including potential returns, risk tolerance, liquidity, and tax advantages.
Compounding interest will help grow your IRA faster. For example, let’s say you start contributing $1,000 per month to your IRA, and your spouse contributes $2,000 per month. After one year, your combined contribution will equal $3,200. At the end of three years, your combined total contribution will be $9,600. In five years, your combined total will be $21,440.
Your IRA assets will grow much faster because of compound interest. Your IRA balance will increase over time, and you won’t pay taxes on the gains. Instead, you’ll owe income taxes on the earnings. However, there are some exceptions. Some types of IRAs don’t allow you to take advantage of compounding interest.
Frequently Asked Questions
How to Decide Between a Traditional or Roth Spousal IRA
There are two main types of Individual Retirement Accounts (IRAs): a traditional IRA and a Roth IRA. These accounts offer different benefits, so it's important to understand how each one works.
A spousal IRA can either be set up as a Roth or traditional IRA. If you're married, you can contribute to both a traditional IRA and a spousal IRA. You can also use the same contribution limit ($5,500 per individual/$6,500 per couple in 2018) for both types of IRAs. However, there are some key differences between a traditional IRA and a traditional spousal IRA.
With a traditional IRA, when contributions are made, those funds are taxed now, but when withdrawals are taken during retirement, the amount withdrawn isn't taxable. In contrast, with a traditional spousal account, when contributions are made to the account, those amounts aren't taxed. But when withdrawals are taken during the retiree's life, the amount withdrawn is considered income and could be taxed.
With a Roth IRA, when contributions are added to the account, the money isn't taxed. But when the money is withdrawn during retirement, the amount taken out isn't taxed. This means that the total amount of money contributed to the account over the course of retirement will be less than what was originally put into the account.
The decision about whether to open a traditional IRA or a traditional spousal Ira depends on several factors. First, consider your current situation. Are you single or married? Do you plan on having children? What age do you plan on retiring? How much money do you want to save for retirement? And finally, what type of investment strategy do you favor?
If you answered "yes," to most of the questions above, a traditional IRA might be worth considering. On the other hand, if you're planning on staying single or don't anticipate having kids, a traditional spousal is probably a better option.
How to Contribute to a Spousal IRA
If you’re planning to open a spousal IRA with your spouse, here are some things to consider. First, you need to know what type of IRA you want to set up. A spousal IRA allows both spouses to contribute to the same account. There are two types of IRAs: Traditional IRA and Roth IRA. With a traditional IRA, the money grows tax deferred and withdrawals aren’t taxed. With a Roth IRA, the earnings grow tax free and withdrawals are taxed. If you don’t take distributions during retirement, the earnings accumulate tax free.
After opening a spousal Roth or traditional IRA, you can make monthly contributions up to the IRS maximum limit ($5,500 per individual/$6,500 per couple). But if you want to make a one-time contribution, you can do it up to $5500. And if you want to make multiple contributions over a period of time, you can do that too.
You can also make a single annual contribution of up to $5500, but the catch is that you must wait until age 50 1/2 to make it. This rule doesn’t apply to a spousal Roth.
Once you’ve opened a spousal IRA and contributed the required amount, you can make transfers from your bank account to the IRA. To avoid penalties, you must make the transfer within 60 days of withdrawing the funds from another source. So, if you withdraw money from a 401(k), you would have to make the transfer within 60 calendar days.
