The Lowdown on Spousal IRAs

Have you recently left the job market to raise your kids, care for an elderly parent or pursue personal interests? Regardless of why you left and whether it's temporary or long term, you might still want to save for retirement while your spouse continues working. If so, tax-favored traditional IRAs and Roth IRAs might be good options for you and your employed spouse to consider. We'll call an IRA set up for a nonworking spouse a spousal IRA. Here are the details.

Nonworking Spouse: Contributing to Your Own Traditional IRA

For the 2022 tax year, a nonworking spouse can make a deductible traditional IRA contribution of up to $6,000 (or up to $7,000 if you'll be age 50 or older as of December 31, 2022). However, there are two important qualifications:

1. The couple must file a joint return, and
2. The working spouse must have earned income that equals or exceeds the sum of the nonworking spouse's contribution plus the working spouse's contribution, if any.

If the working spouse is covered by a tax-favored retirement plan through a job or self-employment, the deductibility of the nonworking spouse's contribution is phased out for the 2022 tax year between joint adjusted gross income (AGI) of $204,000 and $214,000.

If the working spouse isn't covered by a tax-favored retirement plan through a job or self-employment, the nonworking spouse can make a deductible traditional IRA contribution. In this situation, there are no limitations of the couple's joint AGI. 

Your joint AGI is the sum of all taxable income items and gains, reduced by above-the-line deductions, such as those for:

• Up to $250 of unreimbursed expenses for K-12 educators,
• Contributions to a health savings account (HSA),
• Moving expenses for members of the Armed Forces,
• The deductible part of any self-employment tax bill,
• Contributions to self-employed SEP, SIMPLE and qualified retirement plans,
• Health insurance premiums for self-employed people,
• Alimony payments required by pre-2019 divorce agreements, and
• Up to $2,500 of student loan interest.

Working Spouse: Contributing to a Traditional IRA

If your working spouse participates in a tax-favored retirement plan, your spouse's ability to make a deductible traditional IRA contribution for the 2022 tax year is phased out between joint AGI of $109,000 and $129,000.

If neither you nor your spouse participate in a tax-favored retirement plan through a job or self-employment, you and your spouse can each make a deductible traditional IRA contribution of up to $6,000 for the 2022 tax year, regardless of your joint AGI level. The limit increases to $7,000 for this year if you'll be 50 or older as of December 31, 2022. The same contribution limits apply to your spouse.

The only limitation is that you must jointly have enough earned income to at least match the combined amount of your contributions. All the requisite earned income can come from the working spouse.

Hypothetical Examples

To illustrate how this works, suppose you've left the workforce to be a stay-at-home parent. You and your working spouse file jointly, and you'll have $200,000 of joint AGI this year. All the income is from your spouse's job, and your spouse is covered by a qualified retirement plan at work. You don't participate in any plan in 2022. How much can you and your spouse contribute to a traditional IRA?

In this situation, for the 2022 tax year, you, as the nonworking spouse, can make a deductible contribution of up to $6,000 to a traditional IRA set up in your name (or $7,000 for this year if you'll be 50 or older as of December 31, 2022). Your joint AGI is below the $204,000 threshold for the phase-out rule that applies to you.

Your working spouse can't make a deductible traditional IRA contribution, because your joint AGI exceeds the $129,000 top end of the phase-out range that applies to your spouse. However, your spouse can make a nondeductible contribution to a traditional IRA, subject to the aforementioned contribution limits.

Here's another scenario: You were laid off in January. You and your working spouse will have joint AGI of $400,000 for 2022, mostly from your working spouse's self-employment. Your spouse has no retirement plan and you don't participate in any plan for 2022. How much can you and your spouse contribute to a traditional IRA? In this situation, each spouse can make a deductible traditional IRA contribution of up to $6,000 for the 2022 tax year (or up to $7,000 if you'll be age 50 or older as of December 31, 2022).

Traditional IRA Contributions When Both Spouses Work

What are the limits on traditional IRA contributions if both spouses work? If both spouses participate in tax-favored retirement plans, the restrictive AGI-based traditional IRA deduction phase-out range of $109,000 to $129,000 applies to both spouses for the 2022 tax year.

For example, suppose both you and your spouse work, and you both participate in tax-favored retirement plans. If your joint AGI will be $150,000 for 2022, neither you nor your spouse can make a deductible traditional IRA contribution for the 2022 tax year because your joint AGI exceeds the $129,000 top of the deduction phase-out range.

However, if your joint AGI is $109,000 or below, you can make a deductible contribution of up to $6,000 (or $7,000 if you'll be age 50 or older as of December 31, 2022). The same limits apply to your spouse for 2022.

Alternatively, if both spouses work but only one participates in a tax-favored retirement plan, the participating spouse's ability to make a deductible traditional IRA contribution for the 2022 tax year is limited by the $109,000 to $129,000 deduction phase-out range. The nonparticipating spouse falls under the more liberal $204,000—$214,000 deduction phase-out range.

For example, suppose both you and your spouse work, and your joint AGI will be $200,000 for 2022. Your spouse participates in a tax-favored retirement plan, but you don't. How much can you and your spouse contribute to a traditional IRA?

In this scenario, your spouse can't make a deductible traditional IRA contribution for the 2022 tax year because your joint AGI exceeds the $129,000 top of the phase-out range that applies to your spouse. However, your spouse can make a nondeductible contribution of up to $6,000 (or $7,000 if your spouse will be age 50 or older as of December 31, 2022).

You can make a deductible contribution because your joint AGI is below the $204,000 starting point for the deductible contribution phase-out range that applies to a working spouse who doesn't participate in a tax-favored retirement plan. You can contribute and deduct up to $6,000 (or $7,000 if you'll be age 50 or older as of December 31, 2022).

Roth IRA Contributions

With Roth IRAs, deductibility isn't an issue. Contributions are made with after-tax dollars and subject to the same annual contribution limits as traditional IRAs. The Roth IRA tax-saving payoff is on the back end. You can withdraw all your Roth account earnings, along with the sum of your annual contributions, federal-income-tax-free after age 59½, if you've had at least one Roth IRA open for over five years. Roth IRA withdrawals that pass these tests are called qualified distributions.  

However, there are AGI-based limits on annual Roth contributions. Eligibility to contribute to a Roth IRA for the 2022 tax year is phased out between joint AGI of $204,000 and $214,000 for married couples who file joint returns. In addition, you must have enough earned income to at least match the combined amount of Roth contributions by you and your spouse. Again, all the earned income can come from the working spouse. Contributing to a Roth IRA isn't affected by whether you or your spouse participate in a tax-favored retirement plan.

Finally, be aware that the $6,000 contribution limit ($7,000 if you'll be age 50 or older as of December 31, 2022) is the combined limit for traditional IRA contributions (whether deductible or not) and Roth IRA contributions for the 2022 tax year. So, if you contribute the maximum to a Roth, you can't contribute anything to a traditional IRA. If you contribute the max to a traditional IRA, you can't contribute anything to a Roth.

Consider this tax-smart strategy: If your AGI is too high to make a deductible traditional IRA contribution but low enough to make a Roth contribution, make the Roth contribution instead of contributing to a nondeductible traditional IRA. Why? You can withdraw accumulated Roth account earnings as federal-income-tax-free qualified distributions (assuming you pass the tests for qualified distributions). In contrast, earnings that accumulate in a traditional IRA, including one that was funded with nothing but nondeductible contributions, are fully taxable when withdrawn.       

We Can Help

Leaving the workforce doesn't mean you need to stop saving for retirement. Traditional and Roth IRAs are popular savings tools for working and nonworking spouses alike. Contact your SSB tax advisor to determine what's right for your situation.