Since it’s not possible to have a “joint” retirement account, like a joint bank account, there are ways that both spouses can own an IRA, even if one is not employed. Normally to open an IRA, one must be earning taxable income. It does not matter how old a person is or how much they make, as long as it is taxable. The only exception to this rule is something called a Spousal IRA.
Basic Rules for Spousal IRAs
If only one spouse is earning taxable income and the couple files their taxes jointly, the working spouse can use their income to contribute to both their own account and their spouse’s account. The benefit to this is that the couple can effectively double their retirement savings by utilizing this advantage. In order for the working spouse to contribute maximum amounts ($5,500 for 2018, or $6,500 if older than 50) to each account, they must earn more than $11,000 (or $13,000 if older than 50) that year. The IRS won’t allow savers to contribute more than what they earn in taxable income into retirement accounts. If a person earns $8,000 in taxable income in a year, they could contribute the maximum amount into one account, and then contribute the remaining $2,500 into a Spousal IRA. However, if a person earns more than $11,000, then they can contribute the full amounts to each account.
Who Owns the Spousal IRA?
One point to keep in mind is that the Spousal IRA will be in the name of the non-working spouse, even if they don’t directly contribute anything to it. This means, if the couple were to divorce, they would have the right to the money, or at least half depending on the agreements outlined in the divorce. However, if the working spouse made a contribution to the account before the couple divorced in the same year, the non-working spouse must remove the funds or be penalized since they earned no income to justify the contribution. They will also have the right to list beneficiaries on the account in the case of death. For couples who do not agree on beneficiaries, this could be a risk. However, for most couples, having the extra money in retirement is a blessing that far outweighs the risks.
Traditional vs Roth Spousal IRAs
Just like normal IRAs, the Spousal IRA can be set up as a Traditional IRA or a Roth IRA. There are specific eligibility rules for each type of account. For instance, couples must earn below the maximum income levels to contribute to a Roth IRA, and savers are only allowed to contribute to a Traditional IRA up to age 70 ½. Traditional IRAs also require minimum distributions at age 70 ½, while Roth IRAs do not require distributions at a certain age. For more information on the difference between Traditional and Roth IRAs, click here. Always consult a financial professional before opening a retirement account to ensure you are choosing the best type for your personal situation.