Understanding the Critical Differences Between Spousal IRA vs Inherited IRA

When planning for retirement, many people get confused about two distinct account types that share similar names but serve completely different purposes: the spousal IRA and the inherited IRA. While spousal IRA vs inherited IRA discussions often mention spouses in both cases, these accounts operate under entirely different circumstances and rules. Let’s clarify what separates them and how each one works.

The Core Distinction: When and Why They Matter

Spousal IRAs operate during your lifetime. They’re designed to help married couples maximize retirement savings even when one partner doesn’t earn income. A working spouse can contribute to an IRA on behalf of a non-working or low-income spouse, ensuring both partners build retirement security together.

Inherited IRAs activate after death. When an account holder passes away, their beneficiaries—whether spouses or non-family members—receive the retirement account. The inherited IRA allows these beneficiaries to continue benefiting from the tax advantages of the original account, whether it was a traditional IRA or Roth IRA.

Spousal IRA: Building Retirement Savings as a Couple

A spousal IRA enables working spouses to make contributions on behalf of their non-working or low-earning partner. This becomes particularly valuable when one spouse takes time away from employment for caregiving, education, or other life events.

Key requirements:

• Couples must file a joint tax return so the IRS can verify combined income
• The working spouse must have earned income equal to or greater than the contribution amount
• Contribution limits match those of traditional and Roth IRAs—currently $7,000 annually for those under 50, and $8,000 for those 50 and older

The advantage here is straightforward: it prevents the non-working spouse from losing out on retirement savings during years without earned income.

Inherited IRA: Receiving and Managing a Retirement Account

When you inherit an IRA from a deceased loved one, you become the beneficiary of that account. The account maintains its original tax characteristics—a traditional inherited IRA provides tax-deferred growth, while a Roth inherited IRA offers tax-free distributions if certain conditions are met.

However, the rules have shifted significantly. Prior to recent legislation, beneficiaries could use the “stretch IRA” strategy, spreading distributions over their own lifetime. The SECURE 2.0 Act of 2019 changed this by requiring most non-spouse beneficiaries to withdraw the entire account balance within ten years of the original owner’s death.

Tax considerations depend on account type:

• Traditional IRA distributions are taxed as ordinary income
• Roth IRA distributions are tax-free (assuming the account was open for at least five years)

Spousal IRA vs Inherited IRA: Four Key Differences

Strategic Decisions for Spouses Inheriting an IRA

If you’re a surviving spouse who has inherited an IRA, you have several important options to consider:

Rolling the inherited IRA into your own: As a surviving spouse, you can treat the inherited IRA as your own by rolling it into your personal retirement account. This approach potentially delays required minimum distributions (RMDs) until age 73, which is particularly advantageous if you’re younger than your deceased spouse and want funds to continue growing tax-deferred.

Maintaining it as an inherited IRA: Alternatively, you can keep the account separate and classified as inherited. This option allows you to access funds immediately without triggering early withdrawal penalties, even before age 59½.

Understanding tax implications: Inherited IRAs come with specific tax obligations. Traditional IRA withdrawals are subject to income tax as ordinary income, so strategic withdrawal planning is essential. The timing and amount of distributions significantly impact your overall tax liability.

Aligning with your financial goals: Before making decisions, assess how the inherited IRA fits into your broader retirement strategy. Consider your current financial position, liquidity needs, and long-term objectives.

Making Your Choice

The distinction between spousal IRA vs inherited IRA becomes clear when you examine their purposes. Spousal IRAs are contribution vehicles for active retirement planning during your working years as a couple. Inherited IRAs are distribution vehicles that allow beneficiaries—particularly surviving spouses—to preserve wealth and manage tax consequences after an account owner’s passing.

Both account types offer valuable tax benefits, but they require different strategies. Understanding which one applies to your situation and how each operates ensures you make informed decisions that align with your financial well-being. Professional guidance from a financial advisor can help clarify your options and optimize the benefits of either account type.