Definition
A Spousal IRA is an Individual Retirement Account (IRA) established for a nonworking spouse that allows them to contribute to an IRA using their working spouse’s compensation. This provides an opportunity for both spouses to maximize their retirement savings and take advantage of potential tax benefits, even if one spouse has little or no income.
Key Characteristics
- Eligibility: To qualify for a Spousal IRA, couples must file a joint tax return.
- Contribution Limits: For the year 2011, the maximum contribution limit is $5,000 per spouse, or $6,000 if the individual is aged 50 or older and eligible for a catch-up contribution.
- Compensation Basis: Contributions for the nonworking spouse’s IRA can be made based on the working spouse’s compensation, taking advantage of dual savings potential.
Examples
Example 1
John earns $60,000 a year, but his wife, Lisa, does not work. By utilizing a Spousal IRA, John can contribute up to $5,000 to his IRA and another $5,000 to Lisa’s IRA, effectively saving $10,000 under their combined limit.
Example 2
Martha, aged 52, is a homemaker while her spouse, Tim, works and earns $70,000 a year. They can contribute $6,000 to Martha’s Spousal IRA (including a $1,000 catch-up contribution) on top of Tim’s $5,000 contribution to his IRA.
Frequently Asked Questions (FAQs)
Q1: Can a nonworking spouse contribute to an IRA without a Spousal IRA?
A1: No, a nonworking spouse without earned income can’t contribute to an IRA without utilizing a Spousal IRA.
Q2: What tax benefits are available for a Spousal IRA?
A2: Contributions to a traditional Spousal IRA may be tax-deductible, and earnings can grow tax-deferred until withdrawals are made during retirement.
Q3: Can contributions to a Spousal IRA exceed the working spouse’s income?
A3: No, the total contributions to both IRAs (working and nonworking spouses) cannot exceed the working spouse’s earned income.
Related Terms
- Traditional IRA: A retirement saving account where contributions may be tax-deductible and earnings grow tax-deferred.
- Roth IRA: An individual retirement account where contributions are made with after-tax dollars and qualified withdrawals are tax-free.
- Catch-Up Contribution: Additional contribution allowed for individuals aged 50 or older to boost their retirement savings.
Online References
- IRS Retirement Topics - IRA Contribution Limits
- Investopedia: Spousal IRA
- Fidelity - Spousal IRAs: What Married Couples Should Know
Suggested Books for Further Studies
- Retire Secure!: A Guide to Getting the Most Out of What You’ve Got by James Lange
- Your Complete Guide to a Successful and Secure Retirement by Larry E. Swedroe and Kevin Grogan
- The Bogleheads’ Guide to Retirement Planning by Taylor Larimore, Mel Lindauer, Richard A. Ferri, and Laura F. Dogu
Fundamentals of Spousal IRA: Retirement Planning Basics Quiz
### Who is eligible to set up a Spousal IRA?
- [x] A nonworking spouse with a working spouse who has earned income.
- [ ] Any individual over 18 years old.
- [ ] Only self-employed individuals.
- [ ] A nonworking single individual.
> **Explanation:** To set up a Spousal IRA, the couple must file a joint tax return, and one spouse must have earned income.
### What is the maximum contribution limit for a Spousal IRA for the year 2011?
- [ ] $3,000
- [ ] $7,000
- [ ] $4,000
- [x] $5,000
> **Explanation:** For the year 2011, the maximum contribution limit for a Spousal IRA is $5,000 per spouse. This can be increased to $6,000 if the individual qualifies for a catch-up contribution.
### Can a nonworking spouse contribute to both a traditional and a Roth IRA?
- [x] Yes, as long as the total contributions do not exceed the annual limit.
- [ ] No, only one type of IRA is allowed.
- [ ] Yes, but only up to $2,500 in each type.
- [ ] No, contributions are restricted to traditional IRAs only.
> **Explanation:** A nonworking spouse can contribute to both a traditional and a Roth IRA, but the combined total contributions must not exceed the annual limit set by the IRS.
### What type of income can be used to fund a Spousal IRA?
- [x] Earned income of the working spouse.
- [ ] Passive rental income.
- [ ] Interest income from investments.
- [ ] Only dividends from stocks.
> **Explanation:** Contributions to a Spousal IRA are based on the earned income of the working spouse, allowing the nonworking spouse to benefit from retirement savings.
### How many years before retirement do catch-up contributions become available for Spousal IRAs?
- [ ] 5 years
- [ ] 10 years
- [x] The year an individual turns 50
- [ ] The year an individual turns 55
> **Explanation:** Catch-up contributions for Spousal IRAs become available starting in the year the individual turns 50, allowing for additional savings.
### What is a potential benefit of contributing to a traditional Spousal IRA?
- [x] Tax-deductible contributions.
- [ ] Early access to funds at any age.
- [ ] No tax implications on withdrawals.
- [ ] Immediate withdrawal facilities.
> **Explanation:** Contributions to a traditional Spousal IRA may be tax-deductible, providing immediate tax benefits on contributions.
### Are there penalties for early withdrawals from a Spousal IRA?
- [x] Yes, typically a 10% penalty and applicable taxes.
- [ ] No, there are no penalties for early withdrawals.
- [ ] Only if the withdrawal exceeds $10,000.
- [ ] Penalties apply only after age 59 1/2.
> **Explanation:** Early withdrawals from a Spousal IRA, before the age of 59 1/2, typically incur a 10% penalty along with applicable income taxes on the amount withdrawn.
### Must a couple file jointly to contribute to a Spousal IRA?
- [x] Yes, they must file a joint tax return.
- [ ] No, individual filing status is acceptable.
- [ ] Only if both have earned income.
- [ ] Only if they are above a certain income threshold.
> **Explanation:** To contribute to a Spousal IRA, the couple must file a joint tax return, enabling the nonworking spouse to benefit from the working spouse's compensation.
### How does a Roth Spousal IRA differ from a traditional Spousal IRA?
- [x] Contributions are made with after-tax dollars, but withdrawals are tax-free.
- [ ] Withdrawals are taxable, but contributions are tax-deductible.
- [ ] Only working spouses can contribute to a Roth Spousal IRA.
- [ ] Roth Spousal IRAs have lower contribution limits.
> **Explanation:** Contributions to a Roth Spousal IRA are made with after-tax dollars, but qualified withdrawals are tax-free, unlike a traditional Spousal IRA, which offers potential tax-deductible contributions.
### Can both spouses contribute to IRAs even if only one has earned income?
- [x] Yes, using a Spousal IRA arrangement.
- [ ] No, only the working spouse can have an IRA.
- [ ] Only if their combined income exceeds $100,000.
- [ ] Only if IRA contributions are pre-approved by the IRS.
> **Explanation:** Using a Spousal IRA arrangement, both spouses can contribute to their IRAs based on the working spouse's earned income.
Thank you for exploring the essentials of Spousal IRAs! By understanding how to maximize contributions and the resulting tax benefits, you’re well on your way to securing a balanced and comfortable retirement. Keep learning and planning for a prosperous future!
