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  • Spousal IRA – How to Save for Retirement AND Pay Less Taxes



    Spousal IRA

    If you and your spouse both have access to an employer-sponsored 401(k) plan, retirement saving is as easy as specifying the pre-tax contribution amount you want to deduct from your paycheck. But for many couples, it’s a little more complicated and involves a spousal IRA. The decision may be for one spouse to leave full-time work for a period of time to care for children or parents. Or one spouse may have started a new business that currently doesn’t generate any income.

    Lack of income doesn’t have to mean neglecting tax-advantaged retirement. The IRS has created an exception to the rule that an individual must have earned income to make IRA contributions. It’s called a Spousal IRA.

    Contributing regularly can keep retirement savings on track and provide access to tax-free investment growth. If you set up a Traditional IRA, the contribution may be tax-deductible and can lower your tax burden.

    The Rules of the Spousal IRA

    The spousal IRA is a regular IRA account you will configure as either a Traditional IRA or a Roth IRA. It is an individual account held in the name of the spouse. To be able to open one, you will file taxes as “married filing jointly.” The maximum contribution amount is the same – $6,500, with an additional $1,000 catch-up for those age 50 and above.

    If you set up a Traditional IRA and plan to take a deduction, there are some income limits to be aware of. If the working spouse is not covered by an employer’s retirement plan, you will deduct the full amount. The deductible phases out according to income level when the working spouse does have an employer-sponsored plan. For 2022, if income is $109,000 or less, the full amount is deductible. If income is more than $109,000 but less than $129,000, you may take a partial deduction. At $129,000+ the contribution is not deductible. The income levels have adjusted upwards for 2023. The full amount is deductible if income is $116,000 or less. A partial amount may be deducted if income is more than $116,000 but less than $136,000. At $136,000+ none of the contribution is deductible.

    Taking Withdrawals and Distributions

    The spousal IRA follows the same withdrawal rules – you need to be age 59 ½ to take money out, or you’ll get hit with the 10% early withdrawal penalty. And required minimum distributions will also need to be taken out of the account beginning at age 72.

    If part of your retirement plan is to convert Traditional IRAs to Roth IRAs, you’ll need to do some careful planning. Taxes due on the amount withdrawn could create a significant tax burden in the year(s) of the conversion. The Roth conversion will eliminate RMDs in the future, allow the account to remain invested, and simplify estate planning.

    Security For a Longer Retirement

    Contributing to a spousal IRA can add up considerably if done consistently, which will increase the total amount of retirement savings. Depending on income levels, it may also provide an additional tax deduction. But just as important, it protects a spouse when one partner decides to leave the workforce, care for children, or other family members. Since this role still typically falls to women, continuing to contribute to an IRA can provide additional retirement security. Due to women’s longer life expectancy, this is necessary.

    The Takeaway

    A spousal IRA expands the retirement savings toolkit and can help lower taxes during working years. At retirement, you’ll need to decide about whether to convert to a Roth IRA, and implement appropriate tax planning across all retirement accounts.

    Let Hennion & Walsh Offer a Second Opinion

    Curious to learn more? Our unmatched client experience will give you peace of mind. Just as you may seek a second opinion about your health, we believe successful investors can gain value and peace of mind by getting a second opinion on their financial health. So, whether you’re worried about today’s uncertain economic environment or looking for increased peace of mind, we can help. Get a complimentary second opinion on all your retirement accounts not held at Hennion & Walsh today!

    Hennion & Walsh Experience

    We have investment professionals, planners and portfolio managers that can collectively analyze your situation through the lens of their respective disciplines. Each member brings valuable insights to apply to your situation. Whether you are looking for income strategy guidance or growth strategy guidance, a second opinion of all your retirement accounts not currently held at Hennion & Walsh could be beneficial to your financial health.

    Hennion & Walsh Asset Management currently has allocations within its managed money program, and Hennion & Walsh currently has allocations within certain SmartTrust® Unit Investment Trusts (UITs) consistent with several of the portfolio management ideas for consideration cited above.

    Past performance does not guarantee future results. We have taken this information from sources that we believe to be reliable and accurate. Hennion and Walsh cannot guarantee the accuracy of said information and cannot be held liable. You cannot invest directly in an index. Diversification can help mitigate the risk and volatility in your portfolio but does not ensure a profit or guarantee against a loss.

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