Retirement planning is an essential aspect of financial planning, and an Individual Retirement Account (IRA) is one of the most popular ways to save for retirement. However, not everyone can contribute to an IRA, especially those who don’t work outside the home. In this guide, we’ll discuss What is a Spousal IRA and how does it work? We’ll cover everything you need about this retirement savings account, including eligibility requirements, contribution limits, tax implications, and more.
What is a Spousal IRA, and How Does It Work?
A Spousal IRA is an Individual Retirement Account allowing a married couple to contribute to one IRA for each spouse, even if one doesn’t have earned income. The Spousal IRA is not a different type of IRA but allows non-working spouses to contribute to a Traditional or Roth IRA.
Eligibility Requirements
The couple must be legally married and file a joint tax return to open a Spousal IRA. The working spouse must have earned income equal to or higher than the total IRA contributions to both accounts. The non-working spouse must be under 70 1/2 and have a valid Social Security or tax identification number.
Contribution Limits
The contribution limits for a Spousal IRA are the same as for a Traditional or Roth IRA. For 2023, the contribution limit is $6,500 per year, with an additional catch-up contribution of $1,000 for individuals aged 50 or older. Therefore, a married couple can contribute up to $13,000 annually, with an additional $2,000 catch-up contribution if both spouses are 50 or older.
Tax Implications
The tax implications of a Spousal IRA depend on the type of IRA chosen. Contributions to a Traditional IRA are tax-deductible, and the earnings grow tax-deferred until withdrawal. Then, however, the withdrawals are taxed as income in retirement. On the other hand, contributions to a Roth IRA are made with after-tax dollars, and the earnings grow tax-free. Qualified withdrawals from a Roth IRA are also tax-free in retirement.
Next Steps
As you can see, using a Spousal IRA account is an excellent way for those who don’t work outside the home to begin planning retirement. The contributions limits and tax implications may take some getting used to, but once you understand them, it will allow you to maximize your savings as much as possible. So take some time to consider whether this type of account is right for you and your family. And don’t hesitate to contact us if you’d like more information or to request a free quote today!
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Frequently Asked Questions
Can a non-working spouse open a separate IRA account?
Yes, a non-working spouse can open a separate IRA account, but the contribution limits will be lower. For 2023, the maximum contribution for a non-working spouse’s IRA is $6,500.
Can a working spouse contribute to their and their spouse’s IRA accounts?
A working spouse can contribute to their own and their spouse’s IRA accounts, but the total contribution cannot exceed the annual contribution limit.
Can a Spousal IRA be rolled over into another retirement account?
Yes, a Spousal IRA can be rolled into another retirement account, such as a 401k or another IRA.