A Spousal IRA (Individual Retirement Account) is a unique type of retirement account designed for married couples where one spouse earns little or no income. This provision allows the nonworking spouse to contribute to their Individual Retirement Account using the working spouse’s income.
Contribution Limits and Catch-Up Contributions
In 2011, the maximum contribution limit for any Individual Retirement Account (IRA) was set at $5,000 per spouse. This amount increased to $6,000 if the individual was 50 years of age or older, taking advantage of the catch-up contribution provision. For a Spousal IRA, if one spouse has minimal or no compensation, they can utilize their spouse’s earnings to make the maximum allowable contribution to their IRA.
Eligibility Criteria
For a couple to be eligible to fund a Spousal IRA, the following criteria must be met:
- Marital Status: The couple must be married and file a joint tax return.
- Compensation Requirement: The working spouse must have sufficient earned income to cover both contributions.
- Age: The contributing spouse must be under 70½ years of age as of the end of the tax year, for contributions to a Traditional IRA.
Types of Spousal IRAs
There are primarily two types of Spousal IRAs:
- Traditional Spousal IRA: Offers tax-deductible contributions, tax-deferred growth, and taxable distributions upon retirement.
- Roth Spousal IRA: Contributions are made with after-tax dollars, and qualified distributions are tax-free.
FAQs
1. Can both spouses contribute the maximum amount to their IRAs?
Yes, each spouse can contribute up to the maximum limit ($5,000 in 2011, $6,000 if over 50), provided the working spouse has sufficient earned income to cover both contributions.
2. Are there any income limits for contributing to a Spousal IRA?
For Traditional Spousal IRAs, there are no income limits for contributions, although if the working spouse is covered by a retirement plan at work, there may be limits on deductible contributions. Roth IRAs have specific income limits that can affect contribution eligibility.
3. What happens if the couple does not file a joint tax return?
To contribute to a Spousal IRA, the couple must file a joint tax return. Separate returns do not qualify.
Examples
Scenario 1: John earns $60,000 annually, and his spouse Jane earns no wage. John can contribute $5,000 to his own Traditional IRA and another $5,000 to Jane’s Spousal Traditional IRA, assuming they file jointly.
Scenario 2: Martha, age 52, earns $70,000, and her husband George, age 53, has no compensation. They can contribute $6,000 each to their respective Roth IRAs, utilizing the catch-up provision.
Historical Context
The concept of Spousal IRAs was introduced to support married couples in accumulating retirement savings, even when one spouse does not have taxable compensation. This provision seeks to ensure financial stability for both partners in retirement.
Related Terms
- Catch-Up Contribution: Additional contributions allowed for individuals aged 50 and older.
- Earned Income: Compensation that qualifies for IRA contributions, such as wages, salaries, and self-employment income.
- Joint Tax Return: Tax filing status used by married couples to combine their income and deductions on one tax return.
Summary
A Spousal IRA is a crucial tool for retirement planning, allowing nonworking or low-income spouses to build their retirement savings using the working spouse’s income. By understanding the eligibility requirements, contribution limits, and the differences between Traditional and Roth Spousal IRAs, couples can optimize their retirement strategies and ensure a secure financial future.
For further information, please refer to the IRS guidelines and consult with a financial advisor to tailor the best retirement plan for your needs.
