Definition
A Spousal Individual Retirement Account (IRA) is a type of IRA that allows a working spouse to contribute to a non-working spouse’s retirement savings. This allows the non-earning or low-earning spouse to build their own retirement savings tax-free or tax-deferred and allows the couple to boost their mutual retirement savings. The contributing spouse must have earned income and be within the IRS-established income limits to be eligible for this type of account.
Key Takeaways
- A Spousal IRA allows a working spouse to contribute to an IRA in the name of a non-working spouse. This provides an opportunity for the non-working spouse to have a retirement savings account, even without earned income.
- Two different types of Spousal IRAs exist: Traditional and Roth. Each offers its own tax advantages. Contributions to a Traditional IRA may be tax deductible, while withdrawals from a Roth IRA can be tax-free in retirement.
- The IRS sets contribution limits for Spousal IRAs each year. For 2021, the limit is $6,000 for individuals under 50 and $7,000 for those aged 50 and over.
Importance
A Spousal Individual Retirement Account (IRA) is a significant aspect of finance, particularly for retirement planning.
This term is especially essential for couples where one spouse is not employed, as it allows for contributions to be made to the non-earning partner’s retirement account.
Usually, the ability to contribute to an IRA is based on taxable income, but a Spousal IRA recognizes a couple’s joint income, creating an opportunity for a greater combined contribution.
Consequently, it expands a couple’s capacity to save for retirement, allowing for larger savings, tax deductions, and potentially earlier and more comfortable retirement.
It also ensures that both spouses are financially protected in the event of the other’s death, contributing to long-term financial security.
Explanation
A Spousal Individual Retirement Account (IRA) is a special type of retirement savings tool intended to allow an income-earning spouse to contribute to a non-income earning or lesser-earning spouse’s retirement fund. Its primary purpose is to extend the benefits of tax-advantaged retirement savings to a spouse who might not otherwise have access to these benefits, due to lack of earnings or low income.
Thus, the Spousal IRA helps to ensure that both spouses are able to accumulate sufficient retirement savings, regardless of individual income differences. The Spousal IRA is particularly useful for couples where one spouse does not work, or only works part-time, hence does not have an employer-sponsored retirement plan.
The use of a Spousal IRA also acknowledges the often-underestimated economic value of a spouse who may be staying at home to raise children or manage the household. By allowing couples to contribute to an IRA in the non-working or lower-earning spouse’s name, it helps ensure that the retirement savings potential of the couple is not limited by the individual income earning capacity of each spouse.
Examples of Spousal IRA
Retirement Planning: Jane, a stay-at-home mom, has never had a traditional job, therefore doesn’t have access to employment-related retirement benefits. However, her husband Mark works full-time and has a steady income. In order to ensure Jane also has retirement savings, Mark opens a spousal IRA in her name and contributes to it each year.
Spousal Income Shifting: Bob is the primary income earner in his family and finds himself in a high tax bracket. His spouse, Alice, is not employed and thus in a low tax bracket. Bob decides to open a spousal IRA for Alice. In addition to helping save for retirement, contributions to this IRA help reduce the couple’s joint taxable income, resulting in a lower tax liability.
Post-Divorce Financial Planning: After her divorce, Linda received a spousal IRA as part of the distribution of marital assets. She recognized the importance of saving for her future and, understanding that she had a considerable way to go till retirement decided to keep contributing to the IRA. This gave her the opportunity to grow her nest egg in a tax-efficient manner, secured her financial future, and offered her tax advantages.
FAQ for Spousal IRA
What is a Spousal IRA?
A Spousal IRA is a type of Individual Retirement Account that enables a working spouse to contribute to a nonworking spouse’s retirement savings. It allows the non-working spouse to build up their own retirement savings even without earned income.
How does a Spousal IRA work?
A Spousal IRA works similarly to a traditional or Roth IRA, but the key difference is income. In a Spousal IRA, the working spouse’s income is used instead of the account holder’s. This allows a nonworking spouse to build up their retirement savings even if they don’t have an income.
What are the contribution limits for a Spousal IRA?
The contribution limit for a Spousal IRA is the same as a Traditional or Roth IRA. As of 2021, the limit is $6,000 per year, or $7,000 if the account holder is over the age of 50.
What are the benefits of a Spousal IRA?
A Spousal IRA enables the non-working spouse to accumulate retirement savings, which may otherwise be challenging without earned income. Additionally, potential tax benefits could be realized depending on the type of IRA (traditional or Roth) that is used.
Can I withdraw from a Spousal IRA without penalty?
Withdrawals from a Spousal IRA abide by the same rules as regular IRAs. Generally, if you make an early withdrawal before the age of 59.5, you may face a penalty. However, there are certain exceptions to this rule which may allow for penalty-free withdrawals under specific circumstances.
Related Entrepreneurship Terms
- Individual Retirement Account (IRA)
- Contribution Limits
- Earned Income
- Tax Deductions
- Retirement Savings
Sources for More Information
- Investopedia: This is a comprehensive resource for investing and financial education.
- Internal Revenue Service (IRS): They provide official federal tax information, including information on Spousal IRAs.
- Fidelity: This site offers financial services including a wealth of information on IRAs.
- Charles Schwab: This is another trusted source for investing, wealth management, and retirement planning information.
