An ‘often overlooked’ retirement savings option could cut your tax bill, says adviser. Here’s how it works.

There’s still time to lower your 2023 tax bill or boost your refund with a lesser-known retirement savings strategy for married couples.

A requirement for individual retirement account contributions is “earned income,” such as wages or salaries from employment or self-employment income. But there is one exception for single-income households: the spousal IRA.

According to Judy Brown, a certified financial planner at SC&H Group in the Washington, D.C., and Baltimore area, a spousal IRA is a separate Roth or traditional IRA for a non-working spouse — and it’s “often is styled”.

These accounts can provide a current-year tax break and boost retirement savings for the non-earning spouse. By 2021, about 18% of parents did not work outside the home and the majority of stay-at-home parents were women. According to the Pew Research Center.

“I have advice. [nonearning] Women will make sure you’re doing at least that spousal IRA,” said Boston-based CFP Kathryn Villega, founder of Green Bay Advisory.

Married couples who file jointly have until the federal tax deadline — April 15 for most taxpayers — to make 2023 IRA contributions for each spouse, assuming the joint deposits are equal. So there is enough earned income.

Brown, who is also a certified public accountant, explained that traditional pretax spousal IRA contributions could provide a tax break in 2023, depending on income and participation in a workplace retirement plan.

With the income stages for IRA deductions and Roth IRA contributions, many people wait until March or April for last year’s IRA deposits. This can be a “game-time decision” when doing your taxes, Brown said.

Annuity IRA Contribution limits $6,500 for 2023 or $7,500 for savers age 50 or older. The limit increases to $7,000 for 2024, with an additional $1,000 for investors age 50 and older.

However, “it doesn’t have to be all or nothing,” Brown said. Even a $500 or $1,000 spousal IRA contribution can provide tax savings.

While spousal IRA contributions make sense for some couples, there are other factors to consider before making a deposit, said CFP Laura Mattia, CEO of Atlas Fiduciary Financial in Sarasota, Florida.

For example, some couples need extra cash for living expenses or short-term goals, such as paying for a wedding, she said.

Also, too much pre-tax retirement savings can create a “tax problem” in the future, depending on the size of your accounts and required minimum distributions in the future, Mattia said. Pretax withdrawals increase income, which can affect Medicare Part B and Part D premiums, among other consequences.

“It’s a puzzle and really depends on a lot of things,” he added.