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As a business owner, you’re likely aware of the importance of saving for retirement, not just for yourself but for your entire family. If you’re the primary earner and your spouse doesn’t work, you might assume they’re unable to contribute to an IRA. However, that’s not the case. By establishing a spousal IRA, you can extend retirement savings benefits to your non-working spouse, effectively doubling your family’s retirement contributions and taking advantage of tax-deferred growth.
What is a Spousal IRA?
A spousal IRA allows a married couple to contribute to an IRA for a non-working spouse, even if that spouse does not have earned income. The contribution limits for a spousal IRA in 2024 are the same as for an individual IRA: up to $7,000 per year or $8,000 if you’re age 50 or older. This means that a married couple can contribute a combined total of $14,000 ($16,000 if both are age 50 or over) across their IRAs, even if one spouse is not earning income.
Key Requirements for a Spousal IRA
To establish a spousal IRA, you must meet the following conditions:
- Marital Status: You must be married to contribute to a spousal IRA.
- Joint Tax Filing: You must file a joint income tax return for the year in which the contribution is made.
- Sufficient Earned Income: The total earned income of the couple must be at least equal to the total amount contributed to both IRAs.
It’s important to note that all the earned income can come from one spouse. For instance, if you’re the sole breadwinner and you earn $100,000 a year, you can still contribute to both your IRA and your spouse’s IRA, provided your combined contributions don’t exceed your earned income.
Traditional vs. Roth IRA Contributions
When contributing to a spousal IRA, you have the option to choose between a Traditional IRA and a Roth IRA:
- Traditional IRA: Contributions to a traditional IRA may be tax-deductible, depending on your Modified Adjusted Gross Income (MAGI) and whether the income-earning spouse participates in a tax-favored retirement plan, such as a 401(k). The funds in the traditional IRA grow tax-deferred, meaning you won’t pay taxes on the earnings until you withdraw them during retirement.
- Roth IRA: Contributions to a Roth IRA are not tax-deductible, but qualified withdrawals during retirement are tax-free. This can be particularly beneficial if you expect to be in a higher tax bracket during retirement or want to minimize your taxable income in the future.
A couple can choose to contribute to either or both types of IRAs, depending on their financial goals and tax situation. For example, you might choose to contribute to a Roth IRA for yourself while contributing to a traditional IRA for your spouse.
The Long-Term Benefits
The beauty of a spousal IRA lies in the power of compounding. The contributions you make to a spousal IRA grow tax-deferred, meaning the funds can accumulate more quickly than in a taxable account. Over time, this can result in significant savings that will support both you and your spouse during retirement.
Moreover, by taking advantage of a spousal IRA, you’re not only boosting your family’s retirement savings but also potentially lowering your taxable income for the year if you’re eligible to deduct your contributions to a traditional IRA.
Final Thoughts
For business owners, retirement planning is crucial not just for themselves but for their families as well. Establishing a spousal IRA can be an effective strategy to maximize retirement savings and take advantage of the tax benefits offered by the IRS. By meeting the requirements and carefully choosing between a traditional and Roth IRA, you can ensure that both you and your spouse are well-prepared for the future.
If you’re interested in setting up a spousal IRA or need help navigating the specifics, consider reaching out to a tax professional who can provide personalized guidance based on your unique situation.
