Holy Matrimony and The Spousal IRA

A spousal IRA is not a unique IRA, it’s just an allowance for a working individual to contribute to an IRA in the spouses name, if their spouse has little or no taxable income.  Only people with taxable income greater than an IRA contribution can contribute to a Traditional or Roth IRA, except under the special rules of a spousal IRA.

The spousal IRA allowances mean that a stay-at-home parent could still have a retirement account in their name.  It means both spouses can have IRAs, and experience greater tax deductible retirement savings (in the case of Traditional IRAs) than if only the working partner saved for retirement.

Spousal IRA Eligibility

If you want to make contributions to a spousal IRA for your partner, you must meet the following requirements:

• you and your spouse must be married through the end of the tax year
• you and your spouse must file a joint federal tax return
• the person making contributions must have taxable income
• the taxable income for the current tax year must exceed the spouse’s taxable compensation for the same year
• the spouse must be under the age of 70.5 to contribute to a Traditional IRA for your spouse
• if both you and your spouse meet criteria for contributing to a Roth IRA, you can make non-deductible contributions to a spousal Roth IRA.

All of these requirements must be met to make you and your spouse eligible to open and contribute to a spousal IRA.

Contribution Limits

Your allowed contribution to a spousal IRA depends on the taxable compensation each partner receives.  For the 2010 tax year, you can contribute $5,000 to a spousal IRA for individuals under the age of 50, or $6,000 for people age 50 and over.

The non-working spouse’s deductible contribution is phased out for couples who have an adjusted gross income between $167,000 and $177,000 if the working spouse is covered by a qualified retirement plan through their place of employment or through self employment.  The working partner’s eligibility for making a deductible contribution in 2010 is phased out with adjusted gross incomes between $89,000 and $109,000.

If neither partner is participating or eligible to participate in a qualified retirement plan through their employment or self employment, then both the non-working spouse and the working spouse can contribute up to $5,000 in Traditional IRAs for a total of $10,000.  There are no gross adjusted income requirements to do so in this situation.

Consequences of Spousal IRAs

Setting up an IRA for your spouse has the same financial consequences as any other IRA contribution.  There are no other special rules that apply to the spousal IRA, it’s just a special rule that makes it possible for a non-working spouse to have an IRA funded by their working spouse’s income.

Once you have decided the Spousal IRA is right for you, review and compare several companies to ensure you are working with the right provider. This type of investment strategy is an excellent option for those looking to save for retirement in a tax free account.