Surprising Tax Benefits of Spousal IRAs: What You Need to Know

In retirement planning, a Spousal Individual Retirement Account (IRA) emerges as a strategic tool, particularly for couples where only one partner is earning. This type of IRA allows the working spouse to contribute to an IRA in the nonworking spouse’s name, ensuring both partners can build retirement savings.

Key Benefits of a Spousal IRA

  • Inclusive Savings Strategy: A Spousal IRA is designed to include a nonworking spouse in retirement planning, allowing contributions in their name.
  • Dual Contributions: The working spouse can contribute to their own and the nonworking spouse’s IRAs, provided their earned income covers both contributions.
  • Legal Ownership: The Spousal IRA is solely owned by the nonworking spouse despite being funded by the working spouse.
  • Tax Advantages: Depending on whether it’s a traditional or Roth IRA, tax benefits can be realized immediately (standard) or during retirement (Roth).

Understanding the Spousal IRA Mechanism

A Spousal IRA breaks the conventional requirement of earning income to contribute to an IRA. It’s an ideal solution for nonworking spouses who need access to employer-sponsored retirement plans. Deposits to a traditional IRA may be tax-deductible, while Roth IRA contributions, though made with after-tax dollars, offer tax-free withdrawals in retirement.

Eligibility and Contribution Limits

The married couple must file their taxes together to contribute to a Spousal IRA. The IRS sets annual contribution limits, which for 2024 are $6,500 or $7,500 for those aged 50 or older. These limits are subject to change annually.

Choosing Between Traditional and Roth Spousal IRAs

The decision between a traditional and a Roth Spousal IRA hinges on when you prefer tax benefits. Traditional IRAs offer immediate tax deductions, while Roth IRAs provide tax-free withdrawals in retirement. Factors like expected future tax brackets and the need for retirement withdrawals should guide this choice.

Spousal IRAs in the Event of Divorce

In divorce scenarios, Spousal IRAs are typically considered marital property and may be divided accordingly. The specific division depends on state laws and the divorce settlement terms. Understanding the tax implications of any withdrawals made during the divorce process is crucial.

Income Limits and Filing Requirements

For 2024, the upper-income limit for a Spousal IRA is $228,000, increasing to $240,000 in 2024. Couples must file taxes jointly to be eligible for a Spousal IRA.

Ownership and Division of Assets

Once contributions are made to a Spousal IRA, the funds belong to the account holder, i.e., the nonworking spouse. However, in cases of separation or divorce, these assets may be subject to division according to the separation agreement and local laws.

The Bottom Line

A Spousal IRA offers a unique opportunity for couples with a single income to enhance their retirement savings. It’s a testament to the importance of inclusive financial planning, ensuring both partners in a marriage can secure their financial future in retirement. Whether it’s a traditional or Roth IRA, talking to a financial advisor can help determine the best approach for your situation.

Understanding and utilizing a Spousal IRA can be a game-changer in ensuring financial security during the golden years for retirees or those nearing retirement. It’s not just about saving; it’s about intelligent saving. By leveraging the benefits of a Spousal IRA, you can increase your retirement savings and enjoy a more comfortable and secure retirement.

Remember, financial planning is a journey best navigated with knowledge and strategy. Embrace the opportunities Spousal IRAs offer and take a significant step towards a financially secure retirement.