Spousal IRA Requirements: Contributions, Deductibility & Eligibility

Starting a spousal IRA can be a good move for your financial future. However, there are many misconceptions about the rules associated with a spousal IRA. Here are a few of the frequently asked questions regarding spousal IRA requirements.

How Much Can You Contribute To a Spousal IRA?

Each year, you can contribute as much as $5000 to a spousal IRA. Once you reach the age of 60 years old, you will be able to contribute as much a $6000 if you desire.

What Is the Deductibility Phaseout?

If a nonworking spouse has an IRA, typically, they will be able to deduct the amount of their contribution from taxable income. However, if the working spouse is covered by a qualified retirement plan through their work such as a 401k, the nonworking spouse may not be able to deduct the entire amount of their contribution on their taxes. In this situation, there are income restrictions that apply. If the couple file their taxes jointly and as an adjusted gross income of below $166,000, they will be able to deduct the full amount of their contribution to the IRA. However, if they make between $166,000 and $176,000, they will only be able to deduct a partial amount of their contribution from taxable income. If their income is above $176,000, they will not be able to deduct any of their contribution.

What If the Working Spouse Is Self-Employed?

If the working spouse is self-employed and is not covered by a qualified retirement plan, different rules will apply. In this case, both spouses can have an IRA and contribute the full $5000 per year to them. The entire amount of both contributions will be tax-deductible in this situation. Therefore, you could potentially deduct as much as $10,000 or $12,000 depending on your age.

What If Both Spouses Work?

If both spouses are employed, contributing to a qualified retirement account will play a factor in how much you can contribute. If both spouses choose not to contribute to a qualified retirement plan, they can both contribute $5000 per year to their IRAs. This amount can be deducted from their taxes regardless of how much money they make.

When Can Money Be Withdrawn?

After starting a spousal IRA, the money that you invest will be allowed to grow tax-free. However, you cannot touch the money until you reach the age of 59 1/2. If you cash out the money from the account before that age, you will have to pay an early distribution penalty of 10%. You will also have to pay income tax on the money that you withdraw. The only exception to this rule is if you qualify for a hardship withdrawal. Many can be withdrawn from this type of IRA for reasons such as paying for funeral expenses, paying for college tuition, the purchase of a home, or paying for necessary repairs on your primary residence. Other than that, the money has to stay in the account until you reach the proper age.