By Dr. James M. Dahle, WCI Founder
There is a lot of confusion about spousal IRAs out there. I'm going to try to clear up as much of it as possible using a Q&A format.
What Is a Spousal IRA?
There is actually no such thing. A spousal IRA is just an IRA. It can be a traditional (tax-deferred) IRA or a Roth (tax-free) IRA. It has the exact same contribution limits as any other IRA ($6,000 per year, $7,000 if 50+ for 2021). It can be converted to a Roth IRA, it can be rolled over into a 401(k), it can be stretched by your heirs for up to 10 years. It's just an IRA. The deadline for contributions is the day you file your taxes, generally April 15 of the next year, but it can be extended through October 15 of the next year if you file an extension. Once the contribution is made and the deduction (if any) is taken, a spousal IRA acts no differently at all than any other IRA.
So Why Call It a Spousal IRA?
The one unique thing about a spousal IRA is that you don't have to have any personal earned income to make the contribution. It should really be called the “stay-at-home-spouse” IRA or something, because that's who it is for. As long as you file your taxes Married Filing Jointly (MFJ) and the working spouse made enough earned income to cover their own IRA contribution and your IRA contribution, the non-working spouse can still contribute to an IRA without any earned income.
Can I Do a Spousal IRA for My Domestic Partner?
Which part of “spouse” is hard for you to understand? No. You must be legally married by December 31 of the year for which you are making an IRA contribution.
Do We Just Combine Our IRAs?
No. IRA stands for INDIVIDUAL Retirement Arrangement. They are always individually owned. They are never co-owned. Your spouse can be your beneficiary, but they cannot own or co-own your IRA (unless you die). You don't make a $12,000 contribution to an IRA, you make a $6,000 (2021, under 50) contribution to each IRA.
What Are the Spousal IRA Contribution Limits?
The answer to this question depends on three things:
- How much income the couple earned together (technically a modified adjusted gross income or MAGI)
- The age of the spouse
- How the couple files their taxes
If under 50, the maximum spousal IRA contribution is the lesser of $6,000 (2021) or the total amount of earned income (wages, tips, salaries, commissions, nontaxable combat pay, and self-employment income) by the couple minus the non-spousal IRA (and/or Roth IRA) contribution. If 50+, the maximum is $7,000 or the total amount of earned income by the couple minus the non-spousal IRA contribution. Unlike a traditional IRA contribution, where there is no limitation for high-earners, the ability to make Roth IRA contributions is phased out over a MAGI range of $198,000-$208,000 (2021, MFJ). If the couple files their taxes as Married Filing Separately (MFS) instead of Married Filing Jointly (MFJ), no spousal IRA contribution can be made.
How Much of a Traditional Spousal IRA Contribution Can Be Deducted?
The answer to this question depends on a couple of things:
- Whether the working spouse is “covered by a retirement plan” through their employer (i.e. a contribution was made to a defined contribution or defined benefit plan during the calendar year)
- How much income the couple earned together
If neither spouse is covered by a retirement plan, then both spouses may fully deduct contributions to their IRAs no matter what their income. If one spouse is covered, the ability for the spouse without a retirement plan to deduct their contribution is phased out between a MAGI of $196,000-$206,000 (2021, Married Filing Jointly). See the chart below from IRS Pub 590A.
How Is MAGI Calculated?
The calculation to determine Modified Adjusted Gross Income (MAGI) begins with the Adjusted Gross Income (AGI). Your AGI is your total income minus all of your “above the line” deductions, such as retirement account contributions, Health Savings Account (HSA) contribution, deductible part of self-employment taxes, student loan interest deductions, tuition and fees deductions, educator expense deductions, and certain other moving and business expenses. It is calculated on your Form 1040 (see line 11) and especially Part II of Schedule 1 of Form 1040. The AGI is then “modified” by adding back in three types of income (which incidentally, most people contributing to IRAs don't have):
- Excluded foreign income
- Nontaxable Social Security benefits
- Tax-exempt interest (think muni bonds)
What Should We Be Thinking About If We File Our Taxes MFS?
Sometimes spouses file their taxes Married Filing Separately (MFS). In the White Coat Investor Community, the main reason people do this is to “hide” the income of a high-earning spouse from the calculations that the Department of Education uses to determine student loan payments in the Income Driven Repayment (IDR) programs like Income Based Repayment (IBR) and Pay As You Earn (PAYE). Note that the “file MFS to lower payments” trick doesn't work in the Revised Pay As You Earn (REPAYE) program as the income of both spouses is always counted in that program.
Savvy (or, some might argue, unethical) borrowers first file their taxes MFS to lower their required IDR payments (and potentially increase the amount of money forgiven via the tax-free PSLF [10 years of payments while working full-time for a nonprofit], the taxable IBR [25 years of payments], or the taxable PAYE [20 years of payments] forgiveness programs). While this usually lowers the payments due, it also usually increases the tax bill, so these borrowers subsequently refile their taxes a year later as Married Filing Jointly (MFJ) and get those taxes back. Since the Department of Education and the Department of the Treasury don't talk to each other, this essentially lets these investors have their cake and eat it too.
However, filing your taxes MFS can have a serious impact on IRA contributions. For example, you cannot make a spousal IRA (neither traditional nor Roth) contribution when filing taxes MFS (and the “savvy” borrowers described above cannot make an IRA contribution later when they refile their taxes MFJ). In addition to this, the income limit on direct Roth IRA contributions is very different for those filing MFS than for those filing MFJ. Remember, the ability to contribute directly to a Roth IRA is phased out over a MAGI range of $198,000-$208,000 (2021) if you are filing MFJ. But if you file MFS, that phaseout range drops dramatically.
That phaseout range also depends, believe it or not, on whether you are physically living with your spouse at any point during the calendar year for which you are making the contribution. If you live together (even for a day) during the year, your ability to contribute directly to a Roth IRA is phased out between a MAGI of $0 and $10,000. In essence, this means if you are filing MFS and living together, you cannot make a full direct Roth IRA contribution. However, if you live separately for the entire year, that phaseout range occurs between a MAGI of $125,000-$140,000 (2021). This rule essentially means that those who file MFS typically need to do their Roth IRA contributions indirectly through the Backdoor Roth IRA process, just like high earners, at least for the low-earning spouse. Roth IRA contributions are also limited by MAGI on the lower end. Since you cannot do spousal IRA contributions when you file MFS, the maximum contribution in 2021 is the lesser of your own income or $6,000 ($7,000 if 50+).
How Does the Backdoor Roth IRA Process Work with a Spousal Roth IRA?
As noted above, if you file MFS, you cannot do a Spousal traditional or Roth IRA contribution. But the spouse can still contribute to a Roth IRA via the Backdoor Roth IRA process using their own income. If you file MFJ, the Backdoor Roth IRA process works as it does for any other person or couple. A Spousal IRA contribution is made to a traditional IRA. It is subsequently converted to a Roth IRA. The pro-rata rule will apply, so be sure to either convert or transfer into a 401(k) or 403(b) any traditional, rollover, SIMPLE, or SEP IRAs prior to December 31 of the year in which you do the conversion step so you can avoid pro-rata. Every Backdoor Roth IRA question you can possibly think of has been asked and answered multiple times in this Backdoor Roth IRA Tutorial post and in the 2500+ comments below it.
What Else Is Unique About the IRAs of Spouses?
Another unique aspect of the IRA of your spouse has nothing to do with “Spousal IRAs” since there is no difference in a spousal IRA and any other IRA once the contribution and deduction have been determined. This occurs at death. Normally when you inherit an IRA, you must withdraw the contents of that IRA within 10 years of the death of its owner. This is the “New Stretch IRA” that still allows you to stretch that tax-protected growth out for a decade. However, if you inherited the IRA from your spouse, you have three options:
- You can treat it like any other inherited IRA and withdraw the money over 10 years.
- You can combine it with your own IRA and it will then become subject to the withdrawal rules that apply to your IRA.
- You can stretch it according to the old Stretch IRA rules. These rules allowed you to stretch the IRA out over the rest of your life, taking out only the required minimum distribution each year.
This third option can be very useful to someone who is still well below age 59 1/2, allowing them to tap the IRA early and penalty-free but still not have to take it all out within 10 years.
Spousal IRA rules are designed to not penalize families with a stay-at-home parent or a homemaker spouse. However, they can be complicated, so be sure you understand the rules very carefully before using one—and especially before filing your taxes MFS.
What do you think? Have you made spousal IRA contributions? Why or why not? Comment below!
Hello,
The section on how much of a Traditional Spousal IRA Contribution can be deducted is not quite correct. It correctly describes the MAGI limits in place when one spouse is covered by a retirement plan at work and that same spouse is making a Traditional IRA contribution.
However, the rules are different when the spouse making the Traditional IRA contribution is NOT covered by a workplace retirement plan, but the other spouse is. In this case, the spouse making the Traditional IRA contribution can fully deduct that contribution if their MAGI is less than $196, 000 (for TY 2020), eventually phasing out at $206,000.
See the below excerpt from Publication 590-A.
Table 1-3. Effect of Modified AGI1 on Deduction if You Aren’t Covered by a Retirement Plan at Work
If you aren’t covered by a retirement plan at work, use this table to determine if your modified AGI affects the amount of your deduction.
IF your filing status is… AND your modified AGI is… THEN you can take…
single,
head of household, or
qualifying widow(er) any amount a full deduction.
married filing jointly or separately with a spouse who isn’t covered by a plan
at work any amount a full deduction.
married filing jointly with a spouse who is covered by a plan
at work $196,000 or less a full deduction.
more than $196,000
but less than $206,000 a partial deduction.
$206,000 or more no deduction.
married filing separately with a spouse who is covered by a plan
at work2 less than $10,000 a partial deduction.
$10,000 or more no deduction.
1 Modified AGI (adjusted gross income). See Modified adjusted gross income (AGI) , later.
2 You are entitled to the full deduction if you didn’t live with your spouse at any time during the year.
Fixed. Not sure why I wrote that incorrectly as I was certainly aware of that. Good idea on the table. Added that to the post.
My wife retired this year, I will continue working for the foreseeable future. We both have existing Roth IRAs that we have maxed out each year with each of our own earned income. Come next year when my wife has no earned income but I do (in excess of $12k of course), I assume I can make a Roth IRA contribution for her with my earned income into her existing Roth IRA? I.e., is there any requirement (or good reason) to establish a new separate “spousal” Roth IRA for her next year to keep the funds separate?
You can make the full $6,000 contribution to your wife’s existing Roth IRA account, assuming your MAGI level falls below the permissible ceiling for direct Roth IRA contributions. There is no need to create a separate “spousal IRA” account to make your wife’s contribution.
MAGI will be below the $204k limit for 2022 so I will be able to make direct Roth IRA contributions for both of us to the existing accounts. I had assumed this was the case, but it will be a new situation for us in 2022, thanks for confirming my assumption.
Yes, either directly or indirectly depending on income and whether Congress changes the rules this month with the reconciliation bill.
After reading multiple articles + Q&As about backdoor & spousal IRAs on your site, still need some further clarification [guessing I’m making it more difficult than it needs to be].
Newly married & our MAGI is above the limit to directly contribute to roth IRA.
Will be filing taxes jointly next year.
I am contributing to employer 401k, & also have a seperate fidelity account for investing that I recently opened traditional & roth accounts [zero balances] in preparation of backdoor process.
My wife’s employer does not offer a retirement fund.
We have not established a joint bank account to date.
Fidelity seems to only allow 3rd party EFTs for transferring funds out.
Plan to open fidelity account for wife so she can complete $6k backdoor roth for herself.
Question is can my wife contribute more of “her” salary/money to “my” traditional IRA in fidelity directly or do we need a joint account for additional $6k backdoor roth?
If joint bank account is needed, assume this is how one contributes to stay at home spousal IRAs too?
Review the “Do We Just Combine Our IRAs?” section. An IRA belongs to an individual only and there is no such thing as a joint IRA account or one spouse “contributing” to the other spouse’s IRA account.
Assuming a backdoor Roth IRA option remains available, pending legislation notwithstanding, your path here is simple: each of you contributes a non deductible $6,000 contribution to your respective Traditional IRA accounts, and then roll over to your respective Roth IRA accounts.
No joint IRAs. Doesn’t matter whose bank account IRA contributions come out of.
I would emphasize if the working spouse is not actively contributing to a retirement plan at work, both IRAs would be deductible.
Absolutely true, although not very common among my audience.
thank you for helping those who wear the white coat get a “fair shake” on “wall street”!
Can someone clarify for this scenario?
Spouse A *is* covered by a workplace retirement plan.
Spouse B has <$6,000 of earned income and *is not* covered by a workplace retirement plan.
Both under 50, MFJ.
Assume MAGI for the couple is exactly $196k
Can spouse B claim a *traditional* IRA deduction?
If so is it for $6000 …..or capped spouse B's earned income?
Does every $ of combined MAGI above $196k reduce this until the $204k limit?
If I’m tracking correctly .. this would work –
Spouse 1 does get retirement contributions from employer.
Spouse 2 works very part time and earned less than $6500.
Spouse 2 can still contribute $6500 to ira, convert to Roth IRA. You just can’t deduct it for tax purposes bc it’s a Roth conversion and spouse 1 gets retirement contributions from employer.
Does that track?
You can still make a spousal IRA contribution. Whether it is deductible or not depends on lots of things (income, presence of a plan at work etc–see chart above), but whether it is or is not, it’s the same cost once you put it into a Roth IRA.