This individual retirement account option ‘surprises people the most,’ says advisor

One of the ground rules for individual retirement account contributions is you must have “earned income,” such as wages or salary from a job or self-employment earnings.

But there’s a special exception, known as a spousal IRA, which allows you to contribute based on your spouse’s earnings if you file taxes jointly — and there’s still time to save for 2022.

“That’s probably the thing that surprises people the most,” said certified financial planner Malcolm Ethridge, executive vice president of CIC Wealth in Rockville, Maryland.

A spousal IRA is a separate account, meaning both spouses can contribute to their own IRAs. But collectively, annual IRA deposits for the couple can’t exceed joint taxable income or two times the yearly limit.

For 2022, the annual IRA contribution limit is $6,000 for 2022 or $7,000 for savers age 50 and older. The limit jumped to $6,500 for 2023, with an extra $1,000 for investors age 50 and up.

Ethridge said many clients don’t realize they can still make 2022 IRA contributions until the federal tax filing deadline, which is April 18 for most Americans.

And many couples aren’t aware of spousal IRA contributions, according to Julie Hall, a CFP at Vision Capital Partners in Ann Arbor, Michigan.

For example, one spouse may have experienced a layoff or may have taken a break from the workforce to care for family. “They can still continue to save,” she said.

For 2022, couples can still make a combined contribution of up to $12,000 or $14,000, assuming one spouse had at least that much taxable income for the year.

Roth IRA eligibility depends on earnings and your deposits won’t offer a tax break. But you can still score a deduction for pre-tax IRA contributions, assuming you qualify based on income and workplace retirement plan participation.

Of course, the decision about whether to make pre-tax or Roth IRA contributions hinges on more than just the current year’s tax break, Hall added.

Ethridge said many clients don’t realize spousal IRA contributions are also possible when one spouse retires. 

For example, it may make sense if one spouse wants to retire early, and the other plans to keep working. In that scenario, the couple can make spousal IRA contributions from the working spouse’s earnings, he said.

Depending on the retired spouse’s age, it may be an opportunity to replace some of what’s withdrawn for required minimum distributions. “There are a lot of ways to go,” he added.