Spousal IRA Contributions in the Wake of the Great Resignation

A client who has no earned income may still be able to contribute to a retirement account if they have a working spouse.

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.

Additionally, the IRS doesn’t impose any special reporting obligations if the client makes a contribution based on a spouse’s compensation for the year. The client simply makes the contribution as they would in any other “working” year.

The IRA contribution limit is the same regardless of whether the person contributing to the account is working (in 2022, the deductible limit is $6,000, or $7,000 for taxpayers who are 50 or older by year-end).

Active Participant Complication

The rules governing spousal IRA contributions become more complicated if the client’s working spouse is also an active participant in an employer-sponsored retirement plan at work (such as a 401(k) or 403(b) plan). If the spouse does have a retirement plan at work, the ability to deduct any IRA contributions will be limited by the couple’s modified adjusted gross income (MAGI).

For 2022, the non-working spouse can deduct the full IRA contribution limit if the working spouse is covered by a retirement plan at work and the couple’s MAGI is $204,000 or less. If the couple’s MAGI is more than $204,000, but less than $214,000, a partial deduction will be available for the non-working spouse’s IRA contribution.

The deduction will be denied entirely if the working spouse is an active participant in a workplace retirement account and the couple’s MAGI exceeds $214,000.

Conclusion

The Great Resignation has undoubtedly complicated financial planning for many clients over the past year. However, married clients should remember that they may remain eligible for funding their own retirement account based on a spouse’s income even if they don’t have earned income during the current year.

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