Most people believe that you have to be earning income to contribute to a retirement account, and that's true if you're single. But a loophole for married couples allows both individuals to save for retirement, even if only one is working.

It's called a spousal IRA, and it can boost your retirement savings and can potentially reduce your taxable income for the year. In essence, a spousal IRA is a normal IRA that can be either traditional or Roth, but there are special rules about who can have one and how much you can contribute. 

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Spousal IRA rules

To open a spousal IRA, you must meet all of the following criteria:

  • At least one spouse must be working and must earn enough money to cover all contributions made to both spouses' IRAs.
  • You must be legally married and file taxes as "married filing jointly."
  • The nonworking (or lower-earning) spouse must be under age 70 1/2, if you're contributing to a traditional IRA.

If you meet these requirements, you can open a spousal IRA or, if you already have an IRA, one spouse can make contributions to this existing account on behalf of the other.  A spousal IRA is not a joint owned account, but is in the nonworking spouse's name. All funds contributed to this account belong to that spouse, even if the marriage ends.

It's important to be careful not to exceed the IRA annual contribution limits, which may change from year to year at the discretion of the IRS. Contributing too much will incur penalties on the excess amount unless you withdraw it before the tax deadline. You're allowed to contribute up to $6,000 to an IRA in 2019 or $7,000 if you're 50 or older. These limits apply to the combined contributions that you make to all the IRAs in your name, both Roth and traditional. You are not allowed to contribute up to $6,000 (or $7,000 if you're 50+) per IRA. However, if you have an IRA in your own name and a spousal IRA for your non-working spouse, you may contribute up to the annual limit in each person's name. So between the two of you, you could save as much as $12,000 or $14,000, if you're 50 or older, for retirement in 2019.

Benefits of a spousal IRA

The main benefit of using a spousal IRA is that couples can set aside more money for their retirement, even if only one spouse is working, while taking advantage of the tax benefits that come with these accounts.

Traditional IRAs are tax-deferred, meaning you don't pay taxes on the money in the year that you earn it, but you will have to pay taxes when you withdraw the funds in retirement. With Roth IRAs, your contributions do not reduce your taxable income for the current year, but since they are made with after-tax income, you don't pay any taxes when you withdraw the money from a Roth account in retirement.

You can make spousal IRA contributions to a traditional or Roth IRA or both. It's up to you to decide which accounts offer you the best tax advantages. If you believe you're in a higher income tax bracket today than you will be in retirement, a traditional IRA is the better choice. But if you think there's a chance that you'll be in a higher income tax bracket in retirement, a Roth IRA is the way to go.

How to open a spousal IRA

You can open a spousal IRA with any brokerage firm that offers IRAs. You'll need some basic personal information like the nonworking spouse's birthdate and Social Security number, but the process is essentially the same as setting up a regular IRA.

Once the account is open, the working spouse can contribute to the spousal IRA as long as both spouses adhere to the rules listed above. The contributions may seem small, especially compared with the much higher contribution limits of a 401(k), but they add up over time. A single $5,500 investment could turn into more than $55,000 in 30 years, assuming an 8% rate of return, according to the SEC's compound interest calculator.

A spousal IRA is a great way to stash extra money away for your retirement, even if one spouse isn't working. Consider opening one if you're eligible and if you and your spouse can afford to spare a little extra cash and you need the savings boost.

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