Most people with an IRA know that there is a maximum amount of money you can contribute each year. If you’re a high earner, your ability to take a tax deduction for a traditional IRA contribution or to contribute directly to a Roth IRA can be limited by your income.
However, many people don’t realize that there is also an income floor. Specifically, in order to contribute to an IRA, your earned income must justify your contribution. For example, if you contribute $5,000 to a traditional IRA this year, your earned income must be equal or greater than this amount or you can’t contribute to an IRA. But there’s a big exception for married couples.
The spousal IRA
The spousal IRA rule relaxes this requirement for married couples. In a nutshell, if one spouse’s income is too low to make an IRA contribution for themselves, the couple can use the other spouse’s earned income to contribute to an IRA in their name.1
This can be a big retirement saving advantage for couples. If one spouse doesn’t work, it can help the couple effectively double their IRA contribution pace.
The spousal IRA rule can also help in situations where both couples have income, but only one has earned income. Remember, you can only use income sources like wages, salaries, commissions, tips, and income from a business you run or self-employment income. You cannot use rental income, Social Security, interest income, dividends, or other passive sources of income for the purposes of making IRA contributions.
Rules to know about spousal IRAs
Like any retirement savings strategy, it’s important to know the spousal IRA rules, so here’s what you should keep in mind:
- First, all IRA contributions are limited. For 2023, the IRA contribution limit is $6,500 per person, or $7,500 for account owners age 50 or older.2 In 2024, these limits will rise to $7,000 and $8,000, respectively.
- In order to contribute to a spousal IRA, a married couple must file a joint tax return.3
- When using the spousal IRA exception, the spouse with earned income must have enough to justify both contributions. For example, if you contribute $6,000 for both you and your spouse in 2023, you need to have at least $12,000 in earned income. In most situations, this isn’t a limiting factor, but in some cases it could be an issue, such as if both spouses are already retired.
- IRAs are individual accounts — it is what the “I” stands for. If you fund an IRA for your spouse, it legally becomes their money. There is no official account type called a spousal IRA, you are simply opening a standard traditional or Roth IRA under your spouse’s name.
What if you make too much money?
As discussed, the spousal IRA rules are designed so that one spouse can contribute to an IRA on behalf of another who doesn’t meet the earned income requirement by themselves. But what if you make too much money to contribute directly to a Roth IRA, and your participation in an employer’s retirement plan prevents you from taking a tax deduction for a spousal traditional IRA contribution?
After all, for 2023, a married couple filing jointly must earn less than $218,000 to make full Roth IRA contributions for each spouse. And the ability to contribute phases out entirely with income greater than $228,000.4 These are likely to rise proportionately to keep up with inflation in 2024.
In addition, many people don’t realize that even if your spouse doesn’t work and therefore isn’t covered by an employer’s retirement plan, the ability to take a traditional IRA deduction for them can be limited by these same joint income thresholds if you have an employer’s plan available.5
In situations like these, there can be a work-around, just as there is for high-income individuals — the spousal backdoor Roth IRA.
The spousal backdoor Roth IRA
If you aren’t familiar with a backdoor Roth IRA, the general idea is that the IRS limits direct contributions to Roth IRAs for high-income individuals. But it doesn’t have any income limits for non-deductible traditional IRA contributions, nor does it have any income limits to be able to convert a traditional IRA into a Roth.
Not only can you use the backdoor Roth method to make your own Roth IRA contributions, regardless of income, but you can do the same for your spouse as well, essentially potentially doubling the amount of money you (as a couple) are saving on an after-tax basis every year.
The process is relatively straightforward. Simply open a traditional IRA (or use an existing one), make your deposit, and fill out your broker’s form to start the Roth conversion.
The pro-rata rule
Be sure to consider the IRS’ “pro-rata” rule if you or your spouse have any traditional IRA funds (this includes SEP-IRA or SIMPLE IRAs too). If this is the case, the backdoor Roth conversion could trigger a tax bill. The way the pro-rata rule works is that it considers any Roth conversion to include a percentage of any pre-tax money that you already have in accounts. In other words, if you have $10,000 in an existing traditional IRA and you contribute $5,000 with a plan to convert it to a Roth account, the IRS will treat it as if two-thirds of the conversion came from pre-tax money and only one-third isn’t a taxable conversion.6
Of course, if you don’t have any pre-tax IRA funds, and all of your retirement savings accounts are in the form of 401(k) or other employer-sponsored plans, you don’t have to worry about this.
Important things to consider
In addition to the pro-rata rule that may apply if you do a spousal backdoor Roth IRA, there are a couple of other things to keep in mind before you initiate a spousal IRA contribution.
Do you need to save more money?
Do you need to fully max out your IRA contributions? If you’re already maxing out your own retirement accounts and your spouse is contributing an appropriate rate to their employer’s plan, it’s worth considering whether you need to use the spousal IRA route to save even more. Of course, as long as you don’t need the money to cover living expenses, there’s nothing wrong with building even more of a cushion for retirement, but it’s still important to think about.
Diversification of retirement income
Spousal IRAs can help you create a diversified income stream in retirement. For example, let’s say that you and your spouse both contribute to 401(k) plans through your employers, and all of your contributions to date have been pre-tax — meaning you don’t have any Roth-style savings.
If you choose to contribute to a Roth IRA and create one for your spouse as well (even if you need to do the backdoor method), and add money to the account every year, you could build up a significant amount of retirement savings to use as tax-free withdrawals as needed.
Should you use a spousal IRA?
If you are in a situation where you or your spouse doesn’t have enough earned income to contribute to an IRA, a spousal IRA can help you increase your retirement savings. Even if you cannot use a traditional IRA deduction or earn too much to contribute directly to a Roth, you could potentially use the backdoor Roth method for yourself as well as your spouse.
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