What You Need to Know
- A client who has no earned income may still be able to contribute to a retirement account if they have a working spouse.
- Clients are able to flip-flop between spousal and non-spousal contributions.
- If the spouse has a retirement plan at work, the ability to deduct IRA contributions will be limited by the couple’s MAGI.
The shape of the workforce has changed rapidly in the wake of the COVID-19 pandemic. Workers have left their jobs in record numbers — whether to start their own businesses, handle child care obligations or simply focus on what’s important to them in life.
While the “Great Resignation” may be satisfying personally, it shouldn’t also be allowed to destroy clients’ retirement security. Fortunately, clients who are no longer working and earning income in traditional employment settings may still be eligible to contribute to a retirement account if they have a working spouse. Those clients should be advised on the rules governing spousal IRA contributions as a way to keep retirement savings on track going forward.
Spousal IRA Contributions: The Basics
Generally, taxpayers are required to have taxable compensation for the year to open or contribute to an IRA. However, taxpayers who are married and file joint returns with a spouse are entitled to make a contribution based on a working spouse’s taxable compensation. The non-working taxpayer simply opens an IRA or Roth IRA in their own name and contributes to that account based on the spouse’s compensation.
To qualify, the client must have been married to the working spouse as of Dec. 31 of the year of contribution. If the clients are divorced as of Dec. 31, they become unable to make contributions based on a spouse’s earned income even if they were married for the majority of the year in question.
The working spouse remains eligible to contribute to his or her own IRA or Roth IRA, so long as the working spouse’s taxable compensation is at least equal to both spouses’ total contributions for the year.
Clients are also able to flip-flop between spousal and non-spousal contributions. In other words, the client can make a spousal contribution in a year that the client doesn’t have earned income, and later return to making regular contributions if the client again has earned income in a later year. The contributions can be made to the same IRA, so there’s no need to establish a “spousal” and a “regular” IRA.