How to Make Spousal IRA Contributions

Rachel Hartman

If you are married and looking for ways to set aside more money for retirement, you may want to consider funding a spousal individual retirement account. "A spousal IRA is an IRA that can be opened for a non-working or non-participant spouse," says Christine Centeno, a financial planner and founder of Simplicity Wealth Management in Glen Allen, Virginia. A non-participant spouse means a husband or wife who is working but does not have access to a retirement plan through his or her employer.

A spousal IRA provides tax breaks to married couples and a variety of investment options to choose from. Here's what you need to do to set up a spousal IRA.

[Read: New 401(k) and IRA Limits for 2019.]

Spousal IRA Rules

To make the most of a spousal IRA, you'll want to have a solid understanding of how this type of account works. Once you put money into the account, you can choose how you want to invest it. For instance, you might place some funds in mutual funds, stocks or bonds. "It's a regular IRA like any other, subject to all the same rules as regular IRAs, but one with a key difference," says Ryan Smith, a financial advisor at Paragon Financial Services in Richmond, Virginia. This difference lies in the requirements you must meet to put money into an IRA. "The IRS states that you must have earned income to contribute to an IRA," Smith says. "With a spousal IRA, you don't need to have any earned income at all, but your spouse does."

Limits for Contributing to a Spousal IRA

The spouse with earned income can contribute to his or her own IRA and also put funds into the spousal IRA. The total IRA contributions cannot exceed the amount of income brought in. "The household must have earned an income equal to or greater than the amount they are contributing to the IRAs for the year," Centeno says. For example, if a wife earns $10,000 and the husband is not working, the household income is $10,000. Together, the couple can contribute up to $10,000 to IRAs. They might put $5,000 into an IRA for the wife and $5,000 into an IRA for the husband, but do not have to contribute an equal amount to each IRA.

In addition, there are limits to the total amount that can be put into a spousal IRA during the year. The IRS allows up to $6,000 in contributions to an IRA in 2019 for individuals who are under age 50. For those who are 50 or older, the limit in 2019 is $7,000.

[See: 11 Ways to Avoid the IRA Early Withdrawal Penalty.]

How to Open a Spousal IRA

If you want to contribute to a spousal IRA, first make sure you qualify. You'll need to meet the following criteria:

-- Marital status: married.

-- Tax filing status: married, filing jointly.

-- Earnings: The contributing spouse must have earned income equal to at least the amount annually contributed to the non-working spouse's IRA.

If you are eligible, you can look online or visit a nearby financial institution to ask about spousal IRA options. "It's easy to open a spousal IRA, whether it's through an investment company or your local bank," says Michael Gerstman, CEO of the Dallas-based retirement planning firm Gerstman Financial Group. "Probably the biggest question to figure out is if you're better off with a traditional spousal IRA or a Roth spousal IRA."

How to Decide Between a Traditional or Roth Spousal IRA

There are two main types of IRAs. A spousal IRA can be set up as a traditional IRA or a Roth IRA.

With a traditional IRA, when you make contributions to the account, those funds may be tax-deductible. When you withdraw from the account during retirement, the amount you take out will be subject to taxes.

For a Roth IRA, you'll make contributions to the account with money that you've already paid taxes on. When you make withdrawals in retirement, those funds won't be subject to additional taxes.

Taxes play a key role when deciding between a traditional spousal IRA or a Roth spousal IRA. "If you are making your spousal IRA contribution to a traditional IRA, the household can get an income-tax deduction," Smith says. Future withdrawals will be subject to income taxes. "If you are making your spousal IRA contribution to a Roth IRA, you get no tax deduction, but future qualifying withdrawals will be 100 percent tax-free," Smith says. Before deciding, consider your household's current tax situation as well as your future tax estimates. If you plan to be in a lower tax bracket during retirement, a traditional spousal IRA might be a better option. If you expect to be a in a higher tax bracket later, the Roth spousal IRA could be a good fit.

[See: 10 Reasons to Save for Retirement in a Roth IRA.]

How to Contribute to a Spousal IRA

After opening a spousal IRA, you can make contributions up to the IRS annual limits. You might decide to have funds transferred automatically every month from your bank account. You can also make a lump sum contribution once a year. "The contribution must be made with cash," Centeno says. You can save in a traditional spousal IRA until you turn 70 1/2. For a spousal Roth IRA, contributions can be made as long as there are earned wages.