Using the Spousal IRA to Keep Retirement on Track During the Great Resignation

In a blog post last year on Financial Tips for the Great Resignation, CCMI’s Tina Vieregg, CFP®, BFA™ wrote about many workers resigning from their jobs after months of being at home and reflecting on what is truly important to them, providing some great tips about what to before, during, and after their “Big Quit.” She also noted some people are staying home to care for young children or elderly parents, or otherwise do not have access to a traditional retirement plan through an employer. 

For those who are married, there is a strategy to consider that can allow a working spouse to make an individual retirement account (IRA) contribution in the name of a non-working spouse who has little to no income. This is an important exception to the usual requirement that an individual must have earned income to contribute to an IRA. It is a strategy that can allow the non-working spouse to keep their retirement on track and build up their own personal nest egg alongside their working spouse.  

There are a few things to keep in mind if couples are considering this strategy:

• Married couples must file joint tax returns to take advantage of using the spousal IRA strategy. 
• IRAs are not joint accounts; each IRA is set up in the name of an individual spouse.
• There is no age limit on spousal IRA contributions; as long as at least one member of the couple has earned income, contributions can be made no matter your age!
• Per IRS limits, the amount couples filing jointly can contribute to an IRA for their spouse in 2022 is $6,000 per year, or if you are age 50 or older, you may use the catch-up provision to contribute an additional $1,000 ($7,000 in total).
• The income of the working spouse must be equal to or more than the total IRA contributions made on behalf of both spouses. For 2022, the use of the spousal IRA strategy allows married couples filing jointly to contribute $12,000 total to IRAs per year, or $14,000 total if they have reached age 50 and are using the catch-up provision.

Spousal IRA contributions can be made to either a Roth or traditional IRA. However, the IRS has certain rules you must follow depending on each spouse’s access to a retirement plan at work and the modified adjusted gross income (MAGI) you earn as a couple, including these for 2022:

• If neither member of the couple is covered by a retirement plan through their employer, there is no upper limit to their MAGI and a full tax deduction can be taken on their joint tax return for any IRA contributions made within the IRS contribution limits. 
• If both members of the couple are working and covered by their employers’ workplace retirement plan, they have the ability to deduct the IRA contributions from their tax return in full if their MAGI is below $109,000. Between $109,000 to $129,000, only a partial tax deduction is allowed, and tax deductions are disallowed for MAGI over $129,000.
• To use the spousal IRA provision, the non-working spouse can deduct the IRA contribution limit in full from the tax return if the working spouse is covered by a retirement plan at work and the couple’s MAGI is $204,000 or less. If the couple’s MAGI exceeds $204,000 but is lower than $214,000, a partial tax deduction is available for the non-working spouse’s IRA contribution.
• No tax deduction is permitted if the working spouse is an active participant in a workplace retirement account and the couple’s MAGI exceeds $214,000.
• If your MAGI exceeds $214,000, you can always contribute to an IRA up to the IRS limits and not take a tax deduction on your return, as long as you report it. (Even quarterback Patrick Mahomes of the Kansas City Chiefs could make non-deductible contributions to his IRA and to his wife’s IRA if he wants to!)
• Contributions to a spousal Roth IRA, where you contribute after-tax money but can generally withdraw contributions tax-free in retirement, are also limited by maximum income thresholds similar to those of the traditional spousal IRA. The ability to make a full spousal Roth contribution begins to phase out as your MAGI approaches $204,000 and full contributions are not allowed after $214,000.

The spousal IRA is a great tool for not “derailing” your retirement if one spouse is not working, whether you were already not actively participating in the workforce or the Great Resignation spurred you to consider how you would rather use that precious resource of time. CCMI advises clients regularly on making spousal IRA contributions; reach out and we would be happy to help.