Most married couples handle their finances together. But the IRS doesn't treat retirement accounts as a family matter, instead forcing people to have individual IRAs. If you and your spouse have decided that just one of you will work, a spousal IRA could be your only way for the non-working spouse to gain access to the benefits of tax-favored retirement accounts. Let's take a look at how the spousal IRA rules work and whether a spousal IRA makes sense for you.
The challenge of IRAs and stay-at-home spouses
IRAs were developed to give workers an incentive to set some of their money aside for retirement. In 2013 and 2014, people can contribute up to $5,500 to an IRA, with those 50 or older getting to add another $1,000 on top as a so-called "catch-up" contribution.
But one key provision for IRAs is that the maximum you can generally contribute to them is limited by the amount of earned income you have -- earnings from wages, salaries, or self-employment. The idea is that the government didn't want those who can live off their investment income benefiting from the tax advantages that IRAs offer. But that potentially left stay-at-home spouses without a means of saving for their own retirement.
Using a spousal IRA
The spousal IRA rules address the stay-at-home spouse situation by allowing spouses to make contributions to an IRA even if they don't have enough earned income of their own, as long as their family earned income is high enough. Basically, the way it works is that you add up the total earned income from both spouses, and then any earned income that the working spouse doesn't use for an IRA contribution is available to the other spouse for a spousal IRA contribution.
If you qualify, then you're able to treat your spousal IRA just like an ordinary IRA. You have the same choices between a traditional IRA or a Roth IRA that working spouses have, with the same benefits of either upfront tax deductions for traditional IRAs or tax-free treatment in retirement for Roth IRAs. If you start working later, you don't have to worry about opening a separate IRA -- mixing spousal IRA and "regular" IRA contributions is no longer any problem at all.
To qualify for a spousal IRA, you have to file a joint tax return. Moreover, you have to meet certain other requirements for IRA contributions. For instance, if you'll be age 70 1/2 or older by the end of the year, you're not eligible to make a spousal IRA contribution, even if your spouse is younger than that age. If your family income goes above the limits for making Roth IRA contributions, then you won't be able to use a Roth for your spousal IRA. In other words, the intent of the spousal IRA is to treat you just like a working spouse, with all the benefits and limitations that ordinary IRAs have.
Why it's so important
Tax-deferred retirement accounts are a great way to save for retirement, and the spousal IRA gives stay-at-home spouses the chance to save on an equal footing with working spouses. To make the most of your retirement savings opportunity, knowing the spousal IRA rules can take you a lot further toward meeting your long-term financial goals.