A Spousal IRA isn’t a specific type of IRA (Individual Retirement Account) but rather refers to the ability of a spouse to contribute to an IRA even if they do not have earned income, as long as the other spouse does. This rule is designed to help married couples save for retirement where one spouse may not be working or may have limited income.
Here is a breakdown of how a Spousal IRA works:
- Eligibility: The couple must be married and file a joint tax return. The earning spouse must have enough earned income to cover the IRA contributions.
- Types: A Spousal IRA can be either a Traditional IRA or a Roth IRA. The choice between the two will depend on various factors like the couple’s income, tax-filing status, and retirement goals.
- Contribution Limits: The contribution limits for a Spousal IRA are the same as for any other IRA. The annual contribution limit is $6,000, or $7,000 for those aged 50 and older. (Please verify the current limits as they may have changed.)
- Tax Benefits: The tax benefits depend on whether it’s a Traditional or Roth IRA. Contributions to a Traditional IRA may be tax-deductible, and the earnings grow tax-deferred. Roth IRA contributions are made with after-tax dollars, but qualified distributions are tax-free.
- Distribution Rules: The distribution rules are the same as those for Traditional and Roth IRAs. For instance, penalties may apply for withdrawals made before the age of 59½, except in specific circumstances.
- Importance in the IRA Industry: The concept of a Spousal IRA is crucial in the IRA industry as it provides a way for non-working or lower-earning spouses to save for retirement in a tax-advantaged way. It acknowledges the financial contributions of spouses who may not be participating in the paid workforce but contribute in other ways, such as homemaking or caregiving.