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Unlocking Tax Savings: Exploring a Spousal IRA as a Tool in Retirement Plans

Retired couple

For educators, ensuring robust contributions to retirement accounts is a paramount objective, particularly for those envisioning a retirement spanning three decades or more.

However, many married teachers may not realize that if one spouse currently earns minimal or no income, the working partner can contribute to an individual retirement account (IRA) in the non-working spouse’s name, supplementing their own contributions.

By leveraging spousal IRA contributions to bolster their retirement portfolio, married educators can amplify their total contributions and optimize their access to potential tax advantages, thereby bringing them closer to their retirement aspirations.

You’ll get to know:

  • Spousal IRA contributions: serve as a valuable tool for households aiming to boost their retirement savings, particularly when one spouse earns minimal or no income.
  • Educators have the option to make IRA contributions in the name of a non-working spouse, offering an avenue to enhance retirement funds.
  • Whether opting for a Traditional IRA or a Roth IRA, a spousal IRA provides flexibility and tax advantages, catering to diverse financial goals and preferences.

Understanding the Spousal IRA

A spousal IRA offers a unique opportunity for couples to save for retirement, even if one partner has limited or no earned income. Unlike traditional IRAs, which typically require earned income for contributions, a spousal IRA extends this benefit to both spouses, allowing the nonworking partner to save tax-efficiently for the future.

Contrary to common misconceptions, a spousal IRA is not a separate type of IRA. Instead, it is simply either a Roth or traditional IRA that allows a nonworking spouse to access and enjoy the same tax benefits as a working individual.

If your spouse earns little or no annual wages, they may still qualify to open a spousal IRA and benefit from tax-efficient retirement savings. Eligibility only requires that you are married and file a joint tax return.

It’s important to understand that a spousal IRA is not a joint account; rather it’s an individual IRA established in the name of the nonworking spouse.

Exploring the Mechanics of Spousal IRA

The term “spousal IRA” refers to IRS regulations that permit a spouse with no earned income to contribute to an individual retirement account.

As previously explained, there isn’t a special type of IRA for spouses; but this provision simply enables non-working spouses to contribute to a traditional IRA or a Roth IRA. The key condition is that the couple file a joint tax return, linking the employed spouse’s income to the account.

Accounts established under the spousal IRA guidelines are not jointly owned. Instead, both the working and non-working spouses hold IRAs registered in their individual names.

These accounts could have been opened by each spouse before marriage, during their employment, or even by the non-working spouse during a period of unemployment.

Spousal IRAs adhere to the same annual contribution limits as other IRAs, with a cap of $7,000 per individual in 2024. In the preceding tax year of 2023, the limit stood at $6,500.

For educators and other Americans aged 50 or above, the annual contribution limit for 2004 increases to $8,000 per individual, up from $7,500 in 2023.

Sometimes referred to as the Kay Bailey Hutchison Spousal IRA (named after the former U.S. senator who advocated for its establishment), this financial instrument can have significant impact for educators in marriage, as the working partner effectively doubles the couple’s tax-advantaged savings.

How does this sound? By combining an annual contribution of $12,000 over 30 years, with a 5 percent compound return, you could potentially amass over $800,000 in retirement savings.

The Spousal IRA Dilemma: Traditional or Roth?

When it comes to spousal IRA contributions, choosing between a Traditional or Roth IRA is pivotal. Traditional IRAs offer tax-deductible contributions, potentially lowering your taxable income, with withdrawals taxed as ordinary income in retirement.

On the flip side, Roth IRAs are funded with after-tax dollars, enabling tax-free withdrawals of contributions at any time, although earnings withdrawals are generally tax- and penalty-free after age 59 ½ and a five-year account holding period.

iras 1
Roth IRA vs Traditional IRA Analysis

According to T.Rowe Price, selecting the optimal option hinges on various factors, including:

Expected tax rate in retirement:

If you anticipate a higher marginal tax rate post-retirement, opting for a Roth IRA makes sense. Conversely, if you expect lower taxes, deductible contributions to a Traditional IRA could trim your current tax bill.

Income trajectory:

The projection of future income trends, such as potential salary hikes or a spouse’s anticipated earnings, influences the decision. Roth contributions may be advantageous now if a teacher anticipates entering a higher tax bracket later, whereas Traditional IRA deductions could prove more beneficial during peak earning years.

Fluctuations in Income:

Roth IRA contributions face income limits, phasing out as modified adjusted gross income (MAGI) exceeds $230,000 for married couples filing jointly in 2024. If a non-working spouse reduces household income below this threshold, it presents an opportunity for Roth IRA savings.

In cases of indecision between Roth and Traditional IRA contributions, the advantage often tilts towards the Roth IRA. Beyond the benefits mentioned earlier, incorporating a Roth IRA enhances the tax diversification of retirement assets, guarding against potential tax law changes or personal circumstances.

This strategic blend of retirement savings with varying tax treatments empowers better tax management in retirement, including access to tax-free Roth income, which can mitigate tax liabilities. Additionally, Roth IRA contributions can be withdrawn penalty-free at any time, offering added flexibility.

Leveraging a Spousal IRA for Enhanced Retirement Planning

As demonstrated, the Spousal IRA offers an effective way to strengthen joint retirement savings effectively. Furthermore, the non-working spouse gains access to an array of investment options, including mutual funds, exchange-traded funds (ETFs), individual stocks, and bonds.

Despite the seemingly modest maximum annual contribution limit of $7,000 ($8,000 for investors aged 50 or older), making consistent contributions at this level can result in substantial growth in a couple’s retirement nest egg over the years.

Refer to the example below for a clearer illustration of its efficacy.

Spousal IRA in Action

Let’s explore a practical example to illustrate how spousal IRA regulations operate. Meet Richard and Alice McNamara: he is a teacher and she is a freelancer doing occasional online work, both turning 49 years old. The McNamaras individually established and funded their Roth IRAs before tying the knot 15 years ago. 

With Richard’s earnings, the couple plans to save $5,000 in their IRAs for the next tax year. They intend to split this amount equally between their respective Roth IRA accounts, allocating $2,500 to each. 

It’s worth noting that under spousal IRA regulations, Alice cannot exceed certain contribution limits for her own IRA. Therefore, any surplus must be directed to Richard’s account.

Saver’s Credit: An Extra Bonus

By contributing to a spousal IRA, you not only bolster your retirement nest egg but also position yourself to capitalize on the Saver’s Credit, officially known as the Retirement Savings Contribution Credit. 

This credit is designed to reward individuals who prioritize saving for retirement, offering a potential boost to your bottom line.

To qualify for the Saver’s Credit, you must meet several key criteria:

  • You must be at least 18 years old, ensuring that individuals of legal age can avail themselves of this beneficial credit.
  • You cannot be claimed as a dependent on someone else’s tax return, underscoring the importance of financial independence in accessing this benefit.
  • You must not be enrolled as a student, emphasizing the focus on individuals actively contributing to their retirement savings.

The amount you can claim through the Saver’s Credit hinges on your household income, ranging from 0% for those with incomes above the threshold to a generous 50% for individuals with lower household incomes. 

This means that the Saver’s Credit offers a progressive incentive structure, rewarding those who may face greater financial constraints with a higher percentage credit.

Spousal IRA Tax Deductions Simplified

The tax deduction terrain for Traditional IRAs also apply to spousal IRAs. For married couples where only one spouse is working, the deductible amount depends on whether the working spouse is enrolled in a workplace retirement plan.

For joint filers, if the contributing spouse is covered by a workplace retirement plan, the phase-out range for deductions spans between $123,000 and $143,000 in 2024. 

Conversely, if the contributing spouse lacks coverage under a workplace plan, the 2024 phase-out range extended from $230,000 to $240,000, rising from $218,000 to $228,000 in 2023.

How to Open a Spousal IRA Made Easy

Initiating a spousal IRA involves a straightforward process. In general, advisors provide options for both IRAs and Roth IRAs, which you can establish for yourself or your spouse.

In both cases, basic personal details such as the account holder’s name, birthdate, and Social Security number are required.

Once the account setup is complete, you’re ready to commence funding the spousal IRA, laying the groundwork for sharing the so-called “Golden Years”.

Precautionary Measures with Spousal IRA: Anticipating Potential Tax Implications

While spousal IRA contributions may appear advantageous for certain couples, there are additional considerations to keep in mind  before initiating deposits.

For instance, some couples may necessitate additional funds for day-to-day expenses or near-term objectives, such as paying for their child’s college.

Moreover, an excess of pretax retirement savings could potentially lead to “tax problems” later on, contingent upon the size of your accounts and future obligatory minimum distributions. 

Withdrawals from pretax accounts elevate income levels, which could impact Medicare Part B and Part D premiums, among other potential repercussions.

Other Key Reminders for Using Spousal IRAs:

When it comes to spousal IRAs, funding does not equate to ownership. Each spouse maintains sole ownership of their respective IRA, retaining control over investments, beneficiaries, and withdrawals. Contributions made by either spouse are inconsequential in determining ownership rights.

Eligibility for a spousal IRA also hinges on the filing of joint tax returns by married couples. This collaborative tax approach is essential to qualify for the benefits associated with spousal IRAs.

It’s important to note that there’s no age limit dictating contributions to IRAs, as long as one spouse continues to generate earned income. This flexibility ensures that couples can continue to bolster their retirement savings, regardless of age.

Again, when choosing between traditional or Roth IRA plans, it’s imperative to grasp their nuanced differences, as they each offer their own set of advantages and disadvantages.

A pivotal factor to scrutinize is the contribution limits imposed on these IRA plans, which can impact your ability to deduct pre-tax contributions (as observed in traditional IRAs) or to participate in Roth IRAs.

For instance, if you’re enrolled in an employer-sponsored retirement plan like a 401(k), the deductibility of contributions to a traditional IRA may be reduced or even eliminated. Conversely, if neither spouse participates in such a plan, contributions to a traditional IRA typically remain tax-deductible.

Moreover, exceeding the income thresholds for contributions to a Roth IRA may pose a challenge. However, educators can seek professional advice to set up a strategic maneuver known as a backdoor Roth IRA, to overcome this type of limitation.

It’s also crucial to adhere to the timeline for contributions, ensuring they align with tax deadlines. By understanding these intricacies and staying informed about the associated rules and deadlines, American teachers can make informed decisions to optimize their retirement planning strategies.

Final Considerations

A cornerstone of savings strategy in one’s retirement plan could be in spousal IRA contributions, particularly for non-working spouses during periods of workforce absence. 

This avenue not only enhances the individual’s retirement nest egg but also bolsters the household’s overall savings outlook by extending contributions to both partners.

This dual approach effectively doubles the contribution ceiling, while capitalizing on possible tax-deductible benefits.

Especially when one partner retires ahead of the other, maintaining contributions to the retired spouse’s IRA presents an opportunity to leverage a few additional years of savings.

Supplementing other retirement savings options, such as the working spouse’s workplace retirement plan and/or IRAs, spousal IRA contributions offer incremental yet significant additions to the retirement pool. 

Though seemingly modest, you should really consider consulting an advisor to understand if this additional savings can accrue substantial value for safer retirement years.

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Disclaimer: Teacher Retirement Plans does not offer investment advice or recommendations. We share knowledge and content as information only. Please consult a certified financial professional before making any investment decisions.

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