November 3, 2021

Opening a Self Directed Spousal IRA

A Self Directed Spousal IRA is a standard retirement account that utilizes a unique contribution method. In a regular Self Directed IRA, contributions are made from the account holder’s earned income. In the case of a Self Directed Spousal IRA, the contribution is still earned income, but it is not coming from the account holder. Rather, the contribution is being made by their spouse into the Spousal IRA account. Here we will discuss how the unusual Spousal IRA came to be and some of the rules that account holders must follow. 

The Homemaker and the IRA

Anybody familiar with retirement history knows that 1974 was a seminal year. That was the year Congress passed ERISA. With the passing of this law, Americans now had a tax-advantaged way to save for retirement. The only sticking point was that not all Americans could save equally. One of the caveats of the law was that the contributions had to come from earned income. For most American workers, this wasn’t an issue. They received their paycheck and were able to make a contribution from it to their IRA. But what about Americans who were working but didn’t receive a paycheck? What about at-home mothers who were ferrying kids to school and taking care of home duties? Since they didn’t have any official earned income, there was no way for them to save for retirement. 

Since it was in the government’s best interest to appear equitable and have everybody save for retirement, an amendment was passed two years later which allowed for homemakers to open an IRA. That should have solved the problem, but Congress hampered the amendment in a big way. They set a contribution limit for homemakers at just $250 per year. That was in stark contrast to the working spouse’s contribution limit of $1,500. This inconsistency grew worse as IRA contribution limits were gradually raised over the years, but the homemaker limit stayed the same. For the next twenty years, at-home parents remained severely limited in saving for retirement. 

Congress finally addressed this inequity in 1994. Senator Barbara Mikulski from Maryland and Senator Kay Bailey Hutchinson from Texas put forth legislation that would allow homemakers to save the same amount as their paycheck-receiving counterparts. Their efforts paid off and in 1996 Congress passed the Small Business Job Protect Act. The title of Section 1427 of the Act says it all: “Homemakers Eligible For Full IRA Deduction”. In the modern day financial world, this enhanced homemaker retirement account is known as the Spousal IRA.  

How Does a Self Directed Spousal IRA Work?

A Self Directed Spousal IRA works almost entirely like a standard IRA. All the regulations of RMDs, prohibited transactions, and contribution deadlines apply. What makes the Spousal IRA unique is the source of the contributions. Since the homemaker does not have any earned income, they don’t have any legal funds with which to contribute. Rather, the salaried spouse makes the contributions to both of their IRA accounts. One important note to keep in mind is that this is not a joint IRA account. Rather, the Spousal IRA belongs exclusively to the account holder. That means if the couple were to separate at any time in the future, each would keep their respective IRA. The fact that the Spousal IRA was funded by somebody other than the account holder is not taken into account. 

Rules for a Self Directed Spousal IRA

A Self Directed Spousal IRA has a few specific rules which account holders have to keep in mind. 

  • Eligibility – In order to be eligible for a Spousal IRA, the couple must file a joint tax return. 
  • Account type – There are no limitations on account type for a Spousal IRA. It can be Traditional or a Roth. 
  • Age limit – There are no age limits. As long as one member of the couple is working, contributions can be made. 
  • Traditional contribution limits – The contribution limits for a Spousal IRA are the same as a standard IRA. In 2021 individuals can contribute up to $6,000, and $7,000 if they are above 50. That means that the contributing spouse would be able to contribute up to $12,000-$14,000 in any given year and split it equally between the two accounts. 
  • Roth contribution limits – Roth contribution limits are determined by MAGI – modified adjusted gross income. These limits differ between single and married participants. Since we’re dealing with a Spousal IRA, the married limits will be relevant. Here are the current numbers for a couple’s combined salary in 2021. 
MAGIContribution Allowed
Less than $198,000Full contribution
$198,000 - $208,000Partial contribution
More than $208,000No contribution

How To Open a Self Directed Spousal IRA

The process for opening a Self Directed Spousal IRA is the same as for opening a standard Self Directed IRA. Here is a summary of the steps involved: 

  1. Get Educated – There are different kinds of Self Directed IRAs and the one most appropriate for you will depend on your choice of assets. There is plenty of information available online, but the easiest path is to speak with a Self Directed IRA specialist. They will be able to ask you a few decisive questions about your investing plans and then suggest the account that will work best. 
  1. Open a Self Directed Spousal IRA Account – For a standard Self Directed Custodial IRA, this can be done online or over the phone, and shouldn’t take more than 10-15 minutes. The custodian will have you fill out a few forms and provide required documentation. 
  1. Rollover – Most account holders will be rolling over funds from a regular IRA or 401(k) account. This entails filling out a form to request that the funds be sent to the new account. If you are starting a Self Directed Spousal IRA fresh, then you can fund the account by making an initial contribution. 
  1. Invest – Research assets, find one that makes sense for you, and tell the Self Directed custodian to place the investment (via an Investment Authorization form.) 

This process will be modified slightly for those opening a Self Directed Spousal IRA with Checkbook Control. In that case, the Self Directed IRA facilitator will establish a specialized LLC or Trust. The account holder will then be able to use the LLC or Trust to open a checking account at any bank. Investments are made without custodial involvement by simply writing a check. 

Moving Forward with a Self Directed Spousal IRA

Your first step should be to speak with a Self Directed IRA specialist. They will be able to answer your procedural questions, recommend the right kind of account, and guide you through the process.

Reach out to us to learn how to get the set up process started.

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