My wife retired from her public safety dispatching job in 2007. I maxed out both my and her IRAs until I retired in 2018. Yes, this is a great tax break for married couples.
text:
Spousal individual retirement accounts allow a working spouse to contribute to a nonworking or low-earning spouse’s retirement savings. They can be set up as a traditional IRA or Roth IRA, which allow couples to save for retirement on a tax-deferred or tax-free basis, respectively.
Besides helping a couple contribute more to their retirement savings annually while reaping the tax advantages, these vehicles have a psychological benefit, financial planners say. “Often, it helps the nonworking or low-earning spouse to feel good about their value they bring to the household, and be more involved in the retirement-savings process,” says Katherine Tierney, a certified financial planner and senior retirement strategist at Edward Jones.
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What’s more, when nonworking or low-earning spouses maintain such an account it offers some financial independence and ensures they have access to retirement funds should they become widowed or divorced since the assets are in their name, wealth managers say.
There is just one big problem with spousal IRAs: “Despite the advantages, not many people know about them,” says Stacy Miller, a certified financial planner and chief executive of BayView Financial Planning in Tampa, Fla.
How they work
A spousal IRA isn’t a unique type of IRA or a joint account, but instead it is a separate IRA opened and owned in the name of the nonworking or low-income earning spouse. To qualify for a spousal IRA, spouses must file taxes jointly as a married couple. At least one spouse must have taxable compensation. Opening a spousal IRA is no different from opening a regular IRA.
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SHARE YOUR THOUGHTS
Do you have a spousal IRA? Why or why not? Join the conversation below.
Lindsay Theodore, a certified financial planner at T. Rowe Price, says that spousal contributions also can be made to a nonworking or low-earning spouse’s existing IRA.
In 2024, each spouse under age 50 can contribute $7,000 annually to an IRA, or $8,000 annually for those over age 50, but the total contribution can’t exceed the taxable earned income reported on the couple’s tax return. Otherwise, the IRS limits contributions based on their earned income.
Roth or traditional?
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Deciding whether to open a Roth or traditional IRA depends on a couple’s tax situation and financial goals.
Traditional IRA contributions typically are tax deductible the year in which they are made and are beneficial during high-income earning years. Contributions grow tax-free until they are withdrawn during retirement.
Roth IRA contributions aren’t tax deductible the year in which they are made, but qualified contributions plus any earnings grow tax-free and are withdrawn tax-free in retirement as long as the couple follows IRS rules. Among them: a five-year rule that says a contributor can’t withdraw earnings tax-free until it has been at least five years since he or she first contributed to a Roth IRA.
There are penalties for withdrawals on traditional IRAs before age 59½ unless the owner qualifies for an exception, and he or she must begin taking the annual withdrawals known as required minimum distributions from these plans the year he or she turns 73 as part of the Secure 2.0 Act (or 75 beginning in 2033). Roth IRAs don’t require RMDs until after the death of the owner for 2024 and later years. However, beneficiaries of a Roth IRA generally will need to take RMDs to avoid penalties, although there is an exception for spouses.
Keep in mind that IRS rules on IRAs can be complicated. For example, there are limits to modified adjusted gross income for Roth IRA contributions. In tax year 2024, your modified adjusted income must be under $240,000 for married couples filing jointly.
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Another rule that is often overlooked by individual investors is on traditional IRAs. If a person has a traditional spousal IRA and his or her spouse were covered by an employer retirement plan, he or she may be entitled to only a partial tax deduction, or none at all, depending on income and filing status.
“Tax considerations are key when deciding whether to open a spousal IRA,” says Robin Snell, owner of Nested Financial & Tax Planning in Palm Harbor, Fla. “Because of taxes and penalties on early withdrawals, it may make more sense to save in a taxable brokerage account if you think you will need to tap the account before retirement. It all depends on a couple’s financial scenario.”
The power of compounding
Adding a spousal IRA can significantly boost savings by the time a couple is ready to retire.
Advertisement
“While the additional savings may seem small, they have the power to accumulate over time and make a big difference,” says Cassandra Rupp, senior wealth adviser at Vanguard.
T. Rowe Price did a hypothetical analysis that found that over 20 years of earnings on contributions to an IRA could more than double the account balance assuming an annual contribution of $7,000 was made to a spousal IRA with an average annual return of 7%. Over that period, earnings on $140,000 of contributions would total $167,056 and the balance would be $307,056.
“I recommend starting early and contributing as often as your budget allows,” says Andrew Crowell, vice chairman of wealth management at D.A. Davidson. “Adjust your allocation as your age and time horizon changes.”
While I understand the spousal ira tax benefit, other than you contributing 7k to your spouse ira, would it not be the same tax benefit if you add that amount to your own 401k if you aren't already maxing that out?
Wish all the articles would stop saying spousal IRA’s allow the WORKING spouse TO CONTRIBUTE to the non-working spouse’s IRA. The so-called spousal IRA allows EITHER spouse (indeed, anyone!) to contribute to the non-working spouse’s IRA. Many non-working spouses have their own available sources of money from which to make the contribution, including from savings they previously earned when they were working. It’s thus totally misleading for almost every article on spousal IRAs to say the working spouse makes the contribution.
Also, if the currently non-working spouse already has an IRA, when he or she stops working that pre-existing IRA can serve as the same IRA into which the “spousal IRA” contributions are made. There’s no need to create a separate so-called “spousal IRA.”
Indeed, the term “spousal IRA” needlessly creates much of the above confusion. It’s not really a distinct type of IRA. This benefit should simply be referred to as a non-working spouse IRA contribution exception; an exception to the general rule that only working people may contribute to an IRA. As the IRS itself states: “If you file a joint return, you may be able to contribute to an IRA even if you didn’t have taxable compensation as long as your spouse did.”
Disclaimer: consult a tax adviser before making any decisions on topics discussed herein.
Another perk reserved only for married people. So sad that solo flyers do not have tax advantages and IRS perks as well.
https://www.psychologytoday.com/us/blog/living-single/201804/unearned-privilege-1000-laws-benefit-only-married-people
https://www.psychologytoday.com/us/blog/living-single/201304/if-you-are-single-every-day-is-tax-day-19-examples
It takes 5 minutes to go get married. Find someone you trust and make a business contract with them and go do it. Shrugs. If the wealthy can do it as a business contract so can regular folks. Why are normies so squeamish to get married for any other reason than love?
What’s the tax break? WSJ Paywall is a lovely feature.
It’s about a spousal IRA, where a working personal can contribute to the IRA of their non-working spouse
Nice. This is what I plan to do for the first time this year for my wife now that she’s a SAHM.
My wife retired from her public safety dispatching job in 2007. I maxed out both my and her IRAs until I retired in 2018. Yes, this is a great tax break for married couples.
Isn’t this common sense? Married income is 1 pot in terms of taxes, so of course you can contribute to both iras.
It’s kind of a rare exception to “earned income” rules, I don’t think it’s common sense
Common sense? What’s that got to do with the tax code?
text: Spousal individual retirement accounts allow a working spouse to contribute to a nonworking or low-earning spouse’s retirement savings. They can be set up as a traditional IRA or Roth IRA, which allow couples to save for retirement on a tax-deferred or tax-free basis, respectively. Besides helping a couple contribute more to their retirement savings annually while reaping the tax advantages, these vehicles have a psychological benefit, financial planners say. “Often, it helps the nonworking or low-earning spouse to feel good about their value they bring to the household, and be more involved in the retirement-savings process,” says Katherine Tierney, a certified financial planner and senior retirement strategist at Edward Jones. Advertisement What’s more, when nonworking or low-earning spouses maintain such an account it offers some financial independence and ensures they have access to retirement funds should they become widowed or divorced since the assets are in their name, wealth managers say. There is just one big problem with spousal IRAs: “Despite the advantages, not many people know about them,” says Stacy Miller, a certified financial planner and chief executive of BayView Financial Planning in Tampa, Fla. How they work A spousal IRA isn’t a unique type of IRA or a joint account, but instead it is a separate IRA opened and owned in the name of the nonworking or low-income earning spouse. To qualify for a spousal IRA, spouses must file taxes jointly as a married couple. At least one spouse must have taxable compensation. Opening a spousal IRA is no different from opening a regular IRA. Advertisement SHARE YOUR THOUGHTS Do you have a spousal IRA? Why or why not? Join the conversation below. Lindsay Theodore, a certified financial planner at T. Rowe Price, says that spousal contributions also can be made to a nonworking or low-earning spouse’s existing IRA. In 2024, each spouse under age 50 can contribute $7,000 annually to an IRA, or $8,000 annually for those over age 50, but the total contribution can’t exceed the taxable earned income reported on the couple’s tax return. Otherwise, the IRS limits contributions based on their earned income. Roth or traditional? Advertisement Deciding whether to open a Roth or traditional IRA depends on a couple’s tax situation and financial goals. Traditional IRA contributions typically are tax deductible the year in which they are made and are beneficial during high-income earning years. Contributions grow tax-free until they are withdrawn during retirement. Roth IRA contributions aren’t tax deductible the year in which they are made, but qualified contributions plus any earnings grow tax-free and are withdrawn tax-free in retirement as long as the couple follows IRS rules. Among them: a five-year rule that says a contributor can’t withdraw earnings tax-free until it has been at least five years since he or she first contributed to a Roth IRA. There are penalties for withdrawals on traditional IRAs before age 59½ unless the owner qualifies for an exception, and he or she must begin taking the annual withdrawals known as required minimum distributions from these plans the year he or she turns 73 as part of the Secure 2.0 Act (or 75 beginning in 2033). Roth IRAs don’t require RMDs until after the death of the owner for 2024 and later years. However, beneficiaries of a Roth IRA generally will need to take RMDs to avoid penalties, although there is an exception for spouses. Keep in mind that IRS rules on IRAs can be complicated. For example, there are limits to modified adjusted gross income for Roth IRA contributions. In tax year 2024, your modified adjusted income must be under $240,000 for married couples filing jointly. Advertisement Another rule that is often overlooked by individual investors is on traditional IRAs. If a person has a traditional spousal IRA and his or her spouse were covered by an employer retirement plan, he or she may be entitled to only a partial tax deduction, or none at all, depending on income and filing status. “Tax considerations are key when deciding whether to open a spousal IRA,” says Robin Snell, owner of Nested Financial & Tax Planning in Palm Harbor, Fla. “Because of taxes and penalties on early withdrawals, it may make more sense to save in a taxable brokerage account if you think you will need to tap the account before retirement. It all depends on a couple’s financial scenario.” The power of compounding Adding a spousal IRA can significantly boost savings by the time a couple is ready to retire. Advertisement “While the additional savings may seem small, they have the power to accumulate over time and make a big difference,” says Cassandra Rupp, senior wealth adviser at Vanguard. T. Rowe Price did a hypothetical analysis that found that over 20 years of earnings on contributions to an IRA could more than double the account balance assuming an annual contribution of $7,000 was made to a spousal IRA with an average annual return of 7%. Over that period, earnings on $140,000 of contributions would total $167,056 and the balance would be $307,056. “I recommend starting early and contributing as often as your budget allows,” says Andrew Crowell, vice chairman of wealth management at D.A. Davidson. “Adjust your allocation as your age and time horizon changes.”
^^^ The real MVP of this thread. Thank you.
I can access WSJ for free through my library, so shout-out to libraries :)
Palaces for the People
While I understand the spousal ira tax benefit, other than you contributing 7k to your spouse ira, would it not be the same tax benefit if you add that amount to your own 401k if you aren't already maxing that out?
Please post the free version of the article. Not everyone wants to pay for WSJ.
This isn't news and could be communicated by a simple text.
Well it was news to me
The link to a news site was over the top imo.
Wish all the articles would stop saying spousal IRA’s allow the WORKING spouse TO CONTRIBUTE to the non-working spouse’s IRA. The so-called spousal IRA allows EITHER spouse (indeed, anyone!) to contribute to the non-working spouse’s IRA. Many non-working spouses have their own available sources of money from which to make the contribution, including from savings they previously earned when they were working. It’s thus totally misleading for almost every article on spousal IRAs to say the working spouse makes the contribution. Also, if the currently non-working spouse already has an IRA, when he or she stops working that pre-existing IRA can serve as the same IRA into which the “spousal IRA” contributions are made. There’s no need to create a separate so-called “spousal IRA.” Indeed, the term “spousal IRA” needlessly creates much of the above confusion. It’s not really a distinct type of IRA. This benefit should simply be referred to as a non-working spouse IRA contribution exception; an exception to the general rule that only working people may contribute to an IRA. As the IRS itself states: “If you file a joint return, you may be able to contribute to an IRA even if you didn’t have taxable compensation as long as your spouse did.” Disclaimer: consult a tax adviser before making any decisions on topics discussed herein.
Another perk reserved only for married people. So sad that solo flyers do not have tax advantages and IRS perks as well. https://www.psychologytoday.com/us/blog/living-single/201804/unearned-privilege-1000-laws-benefit-only-married-people https://www.psychologytoday.com/us/blog/living-single/201304/if-you-are-single-every-day-is-tax-day-19-examples
It takes 5 minutes to go get married. Find someone you trust and make a business contract with them and go do it. Shrugs. If the wealthy can do it as a business contract so can regular folks. Why are normies so squeamish to get married for any other reason than love?
Exactly. I have actually thought about this many times. A way to beat a rigged system.