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Every Serious Couple Should Talk About Spousal IRAs

Marriage unlocks a way for partners to stay on track for retirement should one person's employment situation change.

(Bloomberg Opinion) -- There are myriad financial advantages to getting married. You might have access to higher quality health care thanks to a spouse’s benefits plan. You may have increased borrowing power from pooling incomes, making it easier to buy a home. You could have a lower tax burden (unless you’re both high earners, then it’s often higher).

Marriage in the US also unlocks an under-discussed retirement option: the spousal IRA.

Whether your employment situation changes because of layoffs, or you’re taking time off to care for a family member, return to school or just take a break, a spousal IRA offers a way to stay on track for a healthy retirement. Yet many people don’t know it exists.

It can take the form of either a traditional or Roth IRA; the key difference is it’s only available for married couples where one spouse elects to leave the workforce and is earning little to no taxable income.

Once the money is contributed into a spousal IRA, it belongs to the person whose name it’s under. This means stay-at-home parents and those who leave the workforce temporarily have a way to protect their financial futures, especially in the case of a future divorce. (Most of the time, these spouses are women: As of June 2022, labor force participation rates for women ages 25 to 54 were 76.4% in the US, while men’s were 88.4%, according to the Department of Labor.) 

To be eligible, you must be a married couple and file joint taxes. One spouse must still earn enough to cover both their own contributions and the contributions for the separate spousal IRA. For example, in 2022, those under 50 can contribute up to $6,000 to an IRA; those 50 and above can contribute $7,000 to an IRA. That means an earning spouse under the age of 50 needs an income of at least $12,000 to make full use of a spousal IRA ($6,000 for contributions to their own IRA, and $6,000 for their spouse’s).

Spousal IRAs also offer a tax advantage. Depending on income levels, the couple could elect to do a Traditional IRA, which allows their taxable income to be reduced now, or use a Roth IRA, in which they contribute post-tax income but are able to withdraw the money tax-free in the future. 

It’s fine if the earning spouse is covered through a retirement plan at work, but this could impact how much of your contributions you can deduct from your taxable income. For example, if you’re married, filing jointly and covered by a retirement plan at work, then your ability to take a tax deduction from traditional IRA contributions phases out at an adjusted gross income of $129,000 in 2022. The twist is, you can still contribute to a traditional IRA, you just don’t get a tax benefit for doing so. Those with an AGI of less than $109,000 can take the full deduction; those more than $109,000 but less than $129,000 get a partial deduction. (The numbers are different for Roth IRAs.)

It should be standard for couples living on a single income to fund a spousal IRA in order to both protect the non-earning spouse and better prepare for the future. Worst case, there’s a divorce and the non-earning spouse has some retirement funds. Best case, there’s even more set aside for both in retirement. 

Of course, family finances are a significant reason a spousal IRA may fall by the wayside. For many Americans, trying to balance the cost of living while battling inflation, plus saving for a child’s college education and possibly caring for aging parents, can easily put retirement planning on the backburner.

Preparing for one’s twilight years is already challenging for many in the US. In 2019, the median amount that Americans aged 55 to 64 had in retirement accounts was $134,000, according to the Survey of Consumer Finances. (The mean was more optimistic, at $408,000.) That figure has likely gone down due to the pandemic, when people may have paused or borrowed funds, and the recent market downturn.

Yet most personal finance advice focuses on $1 million by the retirement age, usually 65, being a low-end benchmark to retire comfortably. This would mean $40,000 a year upon which to live if you apply the 4% withdrawal rule. Many people are nowhere close to this figure, even when supplemented with Social Security.   

Whether or not you utilize a spousal IRA, at least one person should be putting money toward retirement. Although it’s easy to forgo future planning in the name of caring for others and more immediate needs, you need to put on your own financial oxygen mask before assisting others. There are loans your child can take out to pay for college, for example, but no such loan exists to provide you with a comfortable retirement. 

So, couples with the means to be thinking about retirement should consider every tool at their disposal. And you don’t have to max out contributions to a spousal IRA. Even contributions less than the $6,000 or $7,000 maximum will be advantageous. Many partners will need to leave the workforce at one point or another — that shouldn’t stop them from protecting their financial futures. 

To contact the author of this story:
Erin Lowry at [email protected]

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