How a spousal IRA can help couples save for retirement

Lots of people have jobs where they don’t earn any income. Think stay-at-home parents.

These people may want to retire someday, but because they don’t have earned income, they don’t have access to traditional retirement savings options like a 401(k) or IRA.

If they’re married, a spousal IRA could be an option.

A spousal IRA gets around income requirements by allowing a working and income-earning spouse to make a contribution in the name of the spouse who earns little or no income.

RELATED: Take a look at these crucial things you shouldn't off until retirement:

How a Spousal IRA Works

There is no special account for a spousal IRA. It’s just a regular or Roth IRA in a spouse’s name.

“The term spousal IRA really doesn’t mean anything other than you are taking the working spouse’s income and using it to contribute to the non-working spouse’s IRA,” said Jeff Pedersen, a Sioux City, Iowa-based certified financial planner and vice president of private wealth management for Baird. “When you open up an account and it’s an IRA, it’s either a traditional IRA or it’s a Roth IRA. It’s not titled a spousal IRA.”

Each spouse needs to have their own IRA; they cannot be joint.

“All retirement accounts cannot be co-owned,” Pedersen said. “So if a person made one for their spouse, that account is wholly owned separate account, owned by their spouse.”

Even though the accounts must be separate, the married couple can share the distributions once they reach retirement age. Spouses can also be beneficiaries on the other’s account.

To contribute to a spousal IRA, a couple must file their taxes as married filing jointly.

“Since you have earned income in order to make that IRA contribution, the only way you can do that is to utilize the working spouse’s income for that contribution,” Pedersen said. “If you’re filing separately, now there is no working spouse’s income because one tax form is going to show zero income.”

If you contribute to traditional IRAs and your adjusted gross income is between certain IRS thresholds, the amount of the contribution is tax deductible.

For tax years 2019 and 2020, a couple can contribute $12,000 ($6,000 for each person) to IRAs annually if they are younger than age 50. For those 50 or older, the contribution limit is $14,000, or $7,000 each.

The working spouse’s income must equal or exceed the total amount of the contributions for both spouses. You cannot contribute more than you earn.

It is possible to make contributions to a spousal IRA up to the April tax filing deadline even if the calendar year is over.

Why Contribute to a Spousal IRA?

A spousal IRA helps accelerate a couple’s savings for retirement. The amount of money necessary for retirement varies depending on the couple’s lifestyle.

“So let’s say for example, you put $6,000 a year away and earn a 6% return on it. After 25 years, you would end up with more than $330,000,” Pedersen explained.

Pedersen said there is only one main drawback to a spousal IRA.

“The biggest drawback is the fact that your $6,000, you no longer have access to spending that as income currently,” Pedersen said. “But as long as it’s something that a person can budget for, there’s really not a drawback to it.”

Tiffani Sherman is a Florida-based freelance reporter with more than 25 years of experience writing about finance, health, travel and other topics.

This was originally published on The Penny Hoarder, which helps millions of readers worldwide earn and save money by sharing unique job opportunities, personal stories, freebies and more. The Inc. 5000 ranked The Penny Hoarder as the fastest-growing private media company in the U.S. in 2017.

Your resource on tax filing
Tax season is here! Check out the Tax Center on AOL Finance for all the tips and tools you need to maximize your return.
Tax Tips After January 1, 2022
Your tax bill isn't chiseled in stone at the end of the year. Here are 10 tax tips and steps you can take after January 1 to help you lower your taxes, save money when preparing your tax return, and avoid tax penalties.
Read MoreBrought to you
Birth of a Child
The birth of a child is not just a blessed event; it's the beginning of a whole new set of tax breaks for your family. Learn how the newest addition to your family can help trim your tax bill, and how to save for your child's future in the most tax-efficient manner.
Read MoreBrought to you
Ways to Increase Your Tax Refund You Never Thought About
Laying the groundwork for a tax refund requires some simple tax planning, a little research and some forethought. Reviewing your tax status, consulting your spouse when filling out your W-4s and taking advantage of several tax credits can help you increase your tax refund. TurboTax also can help decide which credits can get you the biggest refund.
Read MoreBrought to you
Energy Tax Credit: Which Home Improvements Qualify?
The full renewable energy tax credits are good through 2019 and then are reduced through the end of 2023. Claim the credits by filing Form 5695 with your tax return.
Read MoreBrought to you