Learn How to Make a Spousal IRA Contribution

Couple looking at each other after learning about the spousal IRA.
Don't miss out on the spousal IRA opportunity. Paul Burns / Getty Images

Many couples are missing out on a great way to save - contributing to a spousal IRA for a non-working spouse. You may not be aware of the spousal IRA rules that allow for this. Here's how it works.

You Must Have Earned Income

To make any type of IRA contribution, you must have earned income equal to or greater than the amount of the IRA contribution. For a spousal IRA contribution, as long as one of you has enough earned income, you can make a spousal IRA contribution for a spouse that has no earned income.

That means you can contribute to a spousal IRA for a non-working spouse.

Contribution limits for a spousal IRA are the same limits as for Traditional and Roth IRAs. For 2016, that means a maximum allowable IRA contribution of $5,500 if you are under age 50, and $6,500 if you are 50 or older.

Determine If It Should Be Roth or Traditional

If your income is not too high, then you can make a spousal IRA contribution to either a Traditional IRA or to a Roth IRA. For 2016, if your adjusted gross income (AGI) is $184,000 or less then you can make a spousal Roth IRA contribution on behalf of a non-working spouse.

I advise everyone who is eligible to contribute to a Roth IRA to do so. Roth contributions go in after-tax and grow tax-free. In the long run, using a Roth may deliver a better outcome for you in retirement because Roth IRA withdrawals do not count in certain formulas that are part of the IRS tax code.

If your income is too high and you are not eligible to make the Roth contributions, then you'll have to see if your spousal IRA contribution will be deductible, or nondeductible.

If Using a Traditional IRA, See if You Can Deduct It

If neither of you has a company sponsored retirement plan, your Traditional IRA and Spousal IRA contributions will both be fully deductible.

If you are covered by a company sponsored retirement plan (either through your employer or your own plan if self-employed) than before determining if the contribution is deductible you have to look up the income limitations. If your income is too high, the IRA contribution is not deductible.

Two sets of income limitations apply. The first applies to your ability to deduct your own IRA contribution if you are also a participant in a company retirement plan. For 2016, you can deduct an IRA contribution if your adjusted gross income is below $98,000.

The second income rule applies to your ability to deduct a spousal IRA contribution. If you are making a spousal IRA contribution on behalf of a spouse who is not covered by a company sponsored plan, but you are covered by a company plan, then, for 2016, you can still deduct the spousal IRA if your adjusted gross income is $184,000 or less.

Even if you are not eligible to take a deduction for the IRA contribution, you can still make a non-deductible IRA contribution, which in many cases can provide a back door entry into a Roth IRA. Nondeductible IRAs still grow tax-deferred and have the benefit of creditor protection (creditor protection on IRAs varies by state law).

Have a Younger Non-Working Spouse?

There is a maximum age limit for traditional IRA contributions, which is 70 1/2. You may be able to use a spousal IRA contribution for a younger spouse to get around this. If you are working and over age 70 1/2, but have a younger non-working spouse who is under age 70 1/2, using the spousal IRA rules, you could make an IRA contribution for them.

Bottom Line

When used appropriately, a spousal IRA contribution can allow you to put more money into tax-favored accounts.