What is a Spousal IRA and How Does It Work?

The rules surrounding your ability to contribute to an IRA generally require you to have earned income in order to contribute at all.

This prevents people trying to exploit loopholes such as parents opening and funding an IRA for a child well before the child earns any income.

However, there is one exception available for married couples that can allow for both individuals to contribute to an IRA even when both do not earn an income.

This exception allows stay at home parents and other non-working spouses the ability to still contribute to an IRA despite not earning an income.

Spousal IRA Contributions

If one spouse works and the other does not the non-working spouse does not have earned income to qualify to contribute to an IRA.

With the Spousal IRA rule, the working spouse can contribute funds into the non-working spouse’s IRA on their behalf.

However, your ability to use this exception isn’t just having a spouse with earned income.  There are stipulations associated with the exception that must be met first.

Requirements for Spousal IRA Contributions

Here are the stipulations required to use the Spousal IRA contribution exception:

Types of IRAs

Both Traditional and Roth IRAs can have spousal contributions if other contribution requirements are met.

Age Limit

The rules regarding age limits are the same under the spousal IRA exception as they are with normal Traditional and Roth IRA contributions.

For Traditional IRAs, the spouse whose IRA is funded must by younger than 70 and 1/2 years old.  There are no age limit rules with Roth IRAs.

Eligibility Rules

The eligibility rules surrounding this exception are pretty basic:

• You must be legally married.
• You must file a “married filing joint” tax return.
• The spouse that contributes to the IRAs must have an earned income greater than the IRA contributions.

For example, if both spouses wanted to contribute the full amount to an IRA the working spouse would need a minimum of $10,000 in earned income to do so.

This is the same rule that is in place for when both spouses are working – you can’t contribute more than you earn in a year – just twisted so that if one spouse does not work at all there is still a way to contribute.

Income Limit and Deducting Traditional IRA Contributions

The income limits for married couples that file a joint tax return are normally as follows:

• Traditional IRA: the ability to deduct the contribution begins phasing out at $92,000, complete phaseout at $112,000 if the individual is covered under a qualified retirement plan at work (through self-employment or at an employer)
• Roth IRA: the ability to contribute begins phasing out at $173,000, complete phaseout at $183,000; the ability to deduct is not considered because Roth contributions are post-tax contributions to begin with

If you want to do a spousal contribution into a Roth IRA, you can as long as your adjusted gross income (AGI) is below the normal income limits for a Roth.

However, the rules are different for some Traditional IRA contributions made by a spouse.

• Traditional IRA, Spousal Contribution:
  • If the working spouse is covered by a qualified retirement plan: the ability to deduct the non-working spouse’s contribution is at the higher $173,000 level (phasing out completely at $183,000); the working spouse’s ability to deduct is based upon their AGI as normal
  • If the working spouse is not covered by a qualified retirement plan: both spouses may contribute fully to a Traditional IRA and deduct the contributions regardless of their adjusted gross income

Examples of Spousal IRA Contribution

Let’s assume a wife earns $140,000 per year at her job and her husband doesn’t work.

Can they both contribute to IRAs in the following situations?

Roth IRAs

In this situation the couple earns less than the $173,000 adjusted gross income limit for Roth IRAs.

Both spouses can contribute a full $5,000 contribution ($6,000 if over age 50).  There is no need to consider whether or not the working spouse is covered under a qualifying retirement plan at work.

Traditional IRA with Qualifying Retirement Plan

In this situation the income earning spouse is covered by a qualifying retirement plan at work.

The working spouse’s contribution will be forced to adhere to the normal Traditional IRA adjusted gross income guidelines of phase out beginning at $92,000 and ending at $112,000.  The working spouse can contribute in this instance, but cannot deduct that contribution since AGI is above $112,000.

However, the non-working spouse’s contribution is deductible since AGI is lower than the spousal contribution rule where the ability to deduct begins phasing out at $173,000.

Traditional IRA without Qualifying Retirement Plan

In this situation neither spouse is covered by a qualifying retirement plan so both individuals can make a fully deductible contribution to their Traditional IRAs regardless of their AGI.

Final Thoughts

Even though having a working spouse fund a non-working spouse’s IRA can be confusing, this is a smart move if you can qualify.

Most workers will be covered by a qualified retirement plan and that can limit the working spouse’s ability to deduct their contribution.  However, any extra dollars that can be stashed away for the future is a good move. Getting a tax deduction even though your spouse can stay home is a smart financial move.