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Spouses without earned income can still have an IRA

Quick Summary

  • You need to have “earned income” (taxable compensation) to contribute to a traditional or Roth IRA.
  • An exception to this rule is a spousal IRA, which allows a person with earned income to contribute on behalf of their spouse who doesn’t work for pay.
  • A working spouse can contribute to both IRAs, provided they have enough income to cover both contributions.

An IRA is an excellent tool for retirement savings. These accounts were introduced in the mid-70s as a way to help workers save for retirement and lower their taxable income.

It’s no surprise, then, that you must have income from a job to contribute to—and enjoy the tax benefit—of an IRA. According to IRS rules, you need to have “earned income” to contribute to a traditional or Roth IRA. Despite that, there’s still a way for spouses to have their own IRAs, even if they don’t have earned income.

What Counts as Earned Income?

There are two ways to get earned income: Work for someone else who pays you, or run or own a business (or farm).

Earned income includes:

  • Wages and salaries
  • Tips and bonuses
  • Commissions
  • Self-employment income
  • Disability retirement benefits (until you reach the minimum retirement age you when you would have received a pension or annuity if you didn’t have the disability)

Some types of income don’t count as earned income:

  • Alimony
  • Child support
  • Income from rental property
  • Interest and dividends from investments
  • Pay you received while an inmate
  • Retirement income
  • Social Security
  • Unemployment benefits

Your earned income must match or exceed your IRA contribution. For 2019, you can contribute up to $6,000, or $7,000 if you’re age 50 or older.  So, to make the full contribution, you’d need at least $6,000 (or $7,000) in earned income. If you made less, you can contribute up to the amount you earned.

Important: If you contribute more than you’re allowed to, you’ll owe a 6% penalty every year until you fix the mistake

The Spousal IRA Exception

You can contribute to an IRA on behalf of your spouse who doesn’t have earned income through a spousal IRA. To do so, you must have enough earned income to cover both contributions. To fully contribute to both IRAs, your earned income would have to be at least $12,000, or $14,000 if you’re both age 50 or older.

Keep in mind that IRAs are individual accounts (thus the Individual in IRA). As such, a spousal IRA is not a joint account. Rather, you each have your own IRA—but one spouse funds them both.

In order to take advantage of a spousal IRA, you have to be married, and your tax filing status must be “married filing jointly.” You can’t make a spousal contribution to an IRA if you file separately.

Spousal IRA Benefits

A spousal IRA is an excellent way for a spouse who doesn’t work for pay to save for retirement. Without the spousal IRA exception, spouses with no earned income could have trouble finding a tax-advantaged way to save for retirement.

If one spouse has already maxed out his or her own IRA contributions, it can be a great opportunity for couples to enhance their tax-advantaged retirement planning.

Your spouse can name you as the beneficiary of the spousal IRA, but once you start contributing to the account, the money is your spouse’s. This becomes important if you separate or divorce in the future.

A spousal IRA remains intact even if the spouse without earned income starts to receive pay for work. In this case, he or she can still contribute to the IRA, according to IRA rules.

Spousal IRA Rules

A spousal IRA is an ordinary IRA set up in a spouse’s name. You can set up a spousal IRA as either a traditional or Roth IRA.

The biggest difference between the two is when you get the tax break. With a traditional IRA, you deduct your contributions now and pay taxes later when you take distributions. With Roth IRAs, there’s no upfront tax break, but your contributions and earnings grow tax-free. And qualified distributions are tax-free, as well.

There are other differences, as well. Here’s a quick rundown.

Rules

Roth IRA

Traditional IRA

2019 Contribution Limits $6,000; $7,000, if age 50 or older $6,000; $7,000, if age 50 or older
2019 Income Limits Eligible are single tax filers with modified AGIs of less than $137,000 (phase-out begins at $122,000); married couples filing jointly with modified AGIs of less than $203,000 (phase-out begins at $193,000). Anyone with earned income can contribute, but tax deductibility is based on income limits and participation in an employer plan.
Tax Treatment No tax break for contributions; tax-free earnings and withdrawals in retirement. Tax deduction in contribution year; ordinary income taxes owed on withdrawals.
Withdrawal Rule Contributions can be withdrawn at any time, tax-free and penalty-free. Five years after your first contribution and age 59 ½, earnings withdrawals are tax-free, too. No withdrawals required during the account holder’s lifetime; beneficiaries can stretch distributions over many years. Withdrawals are penalty-free beginning at age 59 ½. Distributions must begin at age 70 ½; beneficiaries pay taxes on inherited IRAs.
Extra Benefits After five years, up to $10,000 of earnings can be withdrawn penalty-free to cover first-time home-buyer expenses. Qualified education and hardship withdrawals may be available without penalty before the age limit and five-year waiting period. These may be taxed. Contributions lower taxpayer’s AGI, potentially qualifying him or her for other tax incentives. Up to $10,000 penalty-free withdrawals to cover first-time home-buyer expenses, but taxes due on distributions. Qualified education and hardship withdrawals are also available.

Securing the Future

Providing spousal contributions to an IRA in your partner’s name can be a good way to boost your tax-advantaged income savings if you only have one income for your household. Additionally, it can be a way to provide a measure of financial security for a spouse who does a great deal of work—but who may not be financially compensated for it.

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