Unfortunately, many families don’t take advantage of the opportunity to make contributions to spousal IRAs when they can afford to do so.
In addition, I believe when you can do so you should favor Roth accounts. Following are the regulations related to contributing to spousal IRAs.
When a couple file a joint return, and as long as one of the spouses has earned income, contributions can be made to the IRA accounts of a nonworking spouse or a spouse whose earnings are below the level which allows maximum IRA contributions.
If you don’t take advantage of the opportunity to make the maximum contribution to the nonworking spouse in a year in which you don’t make the contribution, you can’t make a larger contribution in a subsequent year.
Making such contributions can make a significant difference when you approach retirement. Contributions you make to a spousal IRA account have the same advantages you have with your own IRA account. All dividends and increases in value grow on a tax-deferred basis. If you select a Roth option, all earnings and increases in value will be tax-free.
When a spousal IRA is established, a separate IRA is established for the spouse. The account will be in the name of the spouse. It is not a joint account. Opening the account is no different than opening a regular IRA account. The working spouse has to have sufficient earned income to contribute to both his/her IRA account and the spousal account.
The Savings Game: Inherited IRAs, RMDs and other reader questions
In 2024, a contribution of $7,000 can be made for each spouse; if the both spouses are over 50, then $8,000, then can be contributed to each account. So, if the spouse with earned income of at least $14,000, then $7,000 can be contributed to each account; $8,000 can be contributed to each account as long as the combined earned income of the spouses is at least $16,000 and both spouses are over 50.
Contributions can be made to traditional IRAs or to Roth IRAs. There is no restriction regarding making traditional IRA contributions to one spouse’s account and Roth contributions to the other. Unless there are restrictions associated with your employer retirement account, your contributions to a traditional IRA account are tax-deductible. If you make a contribution to a Roth IRA account, then the contribution will be taxable. With a traditional IRA, when you eventually take distributions, all withdrawals are taxable, and after retirement, at age 75, these accounts will be subject to required minimum distributions. Roth accounts are not subject to required minimum distributions, for you and your beneficiaries.
I recommend using Roth contributions, especially when the family income is low. If you decide to convert to a Roth account later, when family income is higher, the tax will be higher when your marginal tax rate is higher. From a long-term perspective, Roth accounts are more advantageous, both for spouses, and eventual beneficiaries. In 2024, in order to make Roth contributions, your joint modified adjusted income must be under $240,000.
If neither you nor your spouse is covered by an employer retirement plan, then all of your traditional IRA contribution is tax-deductible. If you or your spouse is covered by an employer retirement plan, then there may be restrictions regarding whether your contribution is deductible, and how much you can contribute. You should discuss any possible restrictions with your human resource department.
Consistent contributions of $7,000 a year can make a significant advantage regarding retirement planning. For example, using a return of 7% over a 20 year period, a spousal account with an investment of $7,000 per year would grow to an account of over $300,000.
Bottom line: If you are eligible to establish spousal accounts, and haven’t been making maximum contributions, you should definitely consider doing so. It can make a significant impact regarding your retirement planning.
Elliot Raphaelson welcomes your questions and comments at [email protected].
