If there is one good thing the Coronavirus pandemic did for couples – and there are not many good things to speak of – it is the push to set up spousal IRAs for those who lost their jobs and incomes. A spousal IRA is a type of individual retirement account that allows a working spouse to contribute to a nonworking spouse’s retirement savings.
Women are the largest number of American workers forced out of work as a result of the pandemic. For example, women in the leisure and hospitality sector took a huge hit, at 16.7 percent, based on December 2020 figures. Other sectors, like self-employed workers were in the single digits.
Joblessness ended many men’s careers too. Nearly 5.5 million people are approaching long-term joblessness, and history suggests the longer people are out of work, the harder it is to get back into a job.
The good news is, when one spouse is employed, and the other isn’t, he or she can open a Roth IRA, a traditional IRA, or both for their spouse. In addition, they contribute to their retirement account in his or her name not only with no income but also with low income.
This Exception to the Rule is in Your Favor
You might have been surprised to read “no income but low income.” Haven’t we always known individuals must have earned income to contribute to an IRA? This is an exception to that provision. A spousal IRA is, in fact, either a Roth IRA or traditional IRA.
A spousal IRA is a type of savings strategy that benefits tax efficiency. This is not a joint account, because your spouse opens the spousal IRA as a separate account in their name. So, keep in mind that an Individual Retirement Account cannot be held jointly, for obvious reasons, but spouses can share their distributions when they retire.
So a non-working spouse can still save for retirement. If he or she begins earning income, the spousal IRA doesn’t change or go away, they can still contribute to their IRA. The same annual contribution limits are in place, along with income limits and catch-up contribution provisions, as a Roth or a traditional IRA.
Look at the Numbers
For spousal IRA eligibility in the 2020 tax year, a married couple filing jointly with a modified adjusted gross income of up to $196,000 (and $198,000 in 2021) is eligible to contribute the full amount to each of their Roth IRAs.
Couples must file joint returns to contribute to a spousal IRA. The income limit is an adjusted gross income of $65,000 or less in 2020, or $66,000 or less in 2021.
For 2020 and 2021, there’s a $6,000 limit on taxable contributions to retirement plans. Each spouse can contribute and deduct an additional $1,000 if he or she is 50 or older.
Traditional IRA contributions reduce your taxable income by that amount. It also reduces the amount you will owe to the IRS.
If the working spouse is not in an employer plan, deductible IRA contributions of up to $6,000 can be contributed to both their own IRA and a spousal IRA for a total of $12,000 regardless of the couple’s adjusted gross income (AGI) level.
If the working spouse has an employer-sponsored retirement plan, contribution to a non-working Spousal IRA may not be entirely deductible.
Similar to traditional IRAs, as a couple, you can deduct the full contribution to a traditional spousal IRA from federal income taxes in both 2020 and 2021 tax years if neither is covered by a 401(k) or an IRA-based plan, or an employer-provided pension plan.
If you are covered by any of these employer retirement plans, the amount you can deduct for your contribution to a spousal IRA is based on your modified adjusted gross income (MAGI).
Your Spouse Owns It
At various times, there is confusion about who owns the spousal IRA based on who made the contribution to it. The clear answer is: it doesn’t matter that the working spouse made the contribution, what matters is whose name is on the account. And, as of January 1, 2020, there is no age restriction for contributing to an IRA.
Obviously, the IRS wants you to remember that your total contributions to both your IRA and your spouse’s IRA may not exceed your joint taxable income or the annual contribution limit on IRAs times two, whichever is less. Follow the rules; get the benefits.
Today’s Coronavirus pandemic is more than one year old. Look at the numbers of women who have gotten pregnant during the pandemic and are now tending to their newborns and older children. She has lost both earnings and benefits. A spousal IRA is a timely and sensible solution toward his or her retirement.