How a spousal Roth IRA can help you save for retirement

Individual retirement accounts (IRAs) are among the most common retirement savings options. They can be especially great if you don't have access to an employer-sponsored retirement plan, as they help you to still work toward your retirement goals—whether that's to travel, volunteer, support your family or donate to your favorite causes.

If you're married, you might be dreaming of how you'd like to spend your retirement with your loved one. But what if only one of you works? Can you still save enough to enjoy your ideal retirement? Enter in a spousal Roth IRA.

A spousal Roth IRA allows a working spouse to contribute to a Roth IRA on behalf of a nonworking spouse who has little to no income of their own. If that seems to describe your situation, here's how a spousal Roth IRA works and how you can set one up.

A spousal Roth IRA isn't actually a distinct account type; it's an ordinary Roth IRA that a working spouse funds with their earnings on behalf of their nonworking spouse.

The nonworking spouse owns the account, and it's in their name. The account is treated as if they had funded the account with their own income. It belongs to them, and they have the authority to take distributions or make investment decisions subject to the regular Roth IRA rules.

The standard rule for contributions is that you can only fund a Roth IRA if you have earned income and only up to the amount of your earned income. The IRS defines earned income as "all the taxable income and wages you get from working for someone else, yourself or from a business or farm you own."

This rule makes retirement saving for couples potentially problematic if one spouse doesn't have any earned income. A spousal Roth IRA provides a convenient exception. If at least one spouse has earned income, then both spouses can contribute to a Roth IRA based on that earned income. To take advantage of this workaround, you and your spouse must file a joint tax return.

It's important to note that just because you have sufficient cash to contribute to a Roth IRA for both spouses doesn't automatically mean you can. There must be sufficient earned income to justify each spouse's contribution. Normally, this is not a problem when one spouse has steady, regular employment. However, this may not be a good option if your or your spouse's income consists largely of unearned income, such as ordinary dividends, capital gains, Social Security benefits or pension payments.

Yes. You must meet annual income limits to be able to contribute to a Roth IRA. Spousal Roth IRA income limits are the same. There's a lower income limit and an upper income limit. If you exceed the lower limit, your contribution is reduced. If your income is over the upper limit, you aren't able to contribute to a Roth IRA at all for the year.

• 2022 income limits: You can contribute the full amount to a spousal IRA if your joint modified adjusted gross income is less than $204,000. The amount you're allowed to contribute is phased out until it reaches $214,000, at which point you aren't able to contribute anything.

• 2023 income limits: You can contribute the full amount to a spousal IRA if your joint modified adjusted gross income is less than $218,000 and is phased out at an income of $228,000.

These income limits apply to Roth IRAs but not to traditional IRAs or traditional spousal IRAs. If you don't meet the income limits, you may want to consider that option. However, your ability to deduct a traditional IRA or traditional spousal IRA may be affected if the working spouse is covered by an employer-sponsored retirement plan and their modified adjusted gross income (MAGI) is over the IRS threshold.

Because there are limits to how much any individual can contribute to an IRA each year, spousal IRAs allow you and your spouse to double your annual contribution. Over time, this additional contribution can significantly impact your retirement readiness.

• 2022: $6,000 ($7,000 if age 50 or older)
• 2023: $6,500 ($7,500 if age 50 or older)
  

A significant advantage that a Roth account is that distributions in retirement aren't taxable if you're 59½ and have and the account for at least five years.* This makes Roth IRAs useful tools for creating tax efficiency in retirement. 

In addition to the potential tax savings, qualified Roth IRA withdrawals don't increase the amount of your or your spouse's Social Security benefits that are subject to taxation. They also don't increase your Medicare premium due to the income-related monthly adjustment amount (IRMAA).

Do you need help planning for retirement or want to make sure you're taking advantage of the various types of IRA accounts available to you? Connect with a local financial advisor to learn more about the nuances of saving for retirement and how a spousal Roth IRA may complement your plan.