By: Cynthia Rivera, J.D.
A spousal Individual Retirement Account (IRA) may not be considered a traditional Valentine’s gift, but the work, planning and thought that goes into funding and growing a spousal IRA can be a testimony of present love and care now and for years to come.
What I like about the spousal IRA is that it provides a retirement fund that the non-wage earner can call their own. As a parent who took a break from my career to raise my children, I believe that a spousal IRA can be empowering. Especially for the many spouses who step away from their earning years when they stay at home.
So, on this Valentine’s Day, amid the flowers and chocolates, you may want to consider a non-conventional gift for your spouse – funding a “spousal IRA.”
Spousal IRA- Requirements
In general, a person can contribute to a retirement account, such as an IRA, only if he or she has earned income. However, a special provision allows an income-earning spouse to make a contribution to an IRA held in the name of a non-wage earner spouse. The spousal IRA is opened under the non-wage earner spouse’s name and social security number and the non-wage earner spouse owns the assets in the spousal IRA.
Several requirements must be met in order to make contributions to a spousal IRA: 1) you must be married, 2) file a joint income-tax return, and 3) the wage earner spouse must have earned income at least equal to the IRA contribution amount. The funding deadline is the due date of the tax return without extensions.
For 2019, a working spouse can contribute this year’s annual contribution limit of $6,000 to his or her own spousal IRA. You can contribute up to an additional $1,000 if the spouse is age 50 or older.
Once you meet the eligibility requirements, a spousal IRA can be opened as a Traditional or Roth IRA. A spousal IRA has the same contribution, distribution and age requirements as those of a Traditional IRA or Roth IRA.
Same-sex couples can also benefit from a Spousal IRA, if their union is recognized under the laws of the jurisdiction where the marriage was performed.
It is not too late to fund your IRA for 2019 as long as you make a contribution by April 15, 2020 and designate it for 2019 tax year.
In a Traditional IRA, contributions may be deductible, growth in asset value is tax-deferred, but ultimately your distributions will be taxed. Note that there are no income restrictions on your eligibility to contribute to a Traditional IRA. You can contribute up to the annual limit regardless of how much income you earn. However, there are income limitations for deducting Traditional IRA contributions. For taxpayers with income exceeding the limitations, the contributions are non-deductible.
Contributions to a Spousal Traditional IRA can be fully or partially deducted on your income tax return, depending on income and whether the wage-earner is eligible to participate in an employer’s qualified retirement plan. If you contribute to a Traditional IRA for your non-wage earner spouse, remember that per the SECURE Act you can continue to contribute past age 70½ for tax year 2020 and beyond, as long as you are still working.
Traditional IRAs require a minimum distribution. Under the recently passed SECURE Act, Required Minimum Distributions now begin at age 72 for individuals who turn 70½ in the calendar year 2020. This means that your spouse must withdraw a calculated amount from this account each year, once he or she reaches this age.
If a Traditional IRA is not the best choice for your spouse, then you may consider, alternatively, funding a Roth IRA.
With a Roth IRA, your contributions are from after tax funds (not deductible), while your qualifying distributions are tax-free. There is no age limit for Roth IRA contributions, but the working spouse must have earned income and income eligibility requirements must be met. Roth IRAs also do not have age required distributions for the owner.
Many of our financial decisions and future planning are borne out of love. To take care of those we love….is an ideal that permeates most of our daily thoughts and actions. A spousal IRA could be a great Valentine’s gift that embodies the notion of love and long-term commitment, while providing financial security during a couple’s retirement years.
A spousal IRA provides another venue to save for retirement and by using this strategy, a married couple may double their annual IRA contributions. By funding your spouse’s IRA, you will also be contributing to a higher quality of life during retirement, as you share your retirement assets.
If you and your spouse are financially savvy romantics and meet the eligibility criteria, then a spousal IRA could be a perfect Valentine’s gift!
Discuss your plans and eligibility requirements with your financial advisor, who can assist you with making the choices that are right for you. Happy Valentine’s Day! firstname.lastname@example.org