What You Need to Know About Spousal IRA's

You may have joined the Great Resignation, maybe temporarily or maybe for good. The information below was provided to us from Bradford Tax Institute.

 

Or your non-working status might have nothing to do with the Great Resignation. For instance, you could be a stay-at-home parent.

 

In any case, as a spouse with no tax-defined earned income, you might want to continue saving for retirement in a tax-favored fashion by making contributions to a traditional or Roth IRA.

 

An IRA set up to receive contributions by a non-working spouse is known as a spousal IRA.

 

The working spouse can make IRA contributions to it too.

 

Here’s what you need to know about IRA contributions for married couples that include a non-working spouse.

 

Non-Working Spouse: Traditional Spousal IRA Contributions

 

For the 2022 tax year, you (the non-working spouse) can make a deductible contribution of up to $6,000, or up to $7,000 if you’ll be age 50 or older as of December 31, 2022, to a traditional spousal IRA set up in your name.

 

To make a traditional spousal IRA contribution, you must file a joint Form 1040, and you and your spouse must together have earned income—typically from your working spouse—at least equal to the sum of your contribution plus your spouse’s contribution, if any. Note that taxable alimony received by you or your spouse under a pre-2019 divorce agreement counts as earned income for IRA contribution eligibility purposes.

 

Now It Gets Tricky

 

 

If your working spouse is covered by a tax-favored retirement plan, via a job or self-employment, the deductibility of your traditional spousal IRA contribution is phased out, for the 2022 tax year, between joint adjusted gross income (AGI) of $204,000 and $214,000.

 

Joint AGI is the sum of most taxable income items and gains reduced by so-called above-the-line deductions. These include

 

• the deduction for contributions to a self-employed SEP, SIMPLE, or other self-employed retirement plan;

 

• the deduction for 50 percent of self-employment tax;

 

• the deduction for self-employed health insurance premiums;

 

• contributions to a health savings account (HSA);

 

• alimony payments required by a pre-2019 divorce agreement;

 

• the deduction for up to $250 of unreimbursed expenses for K-12 educators; and

 

• the deduction for moving expenses for eligible members of the Armed Forces

 

If your working spouse is not covered by a tax-favored retirement plan, via a job or self-employment, you (the nonworking spouse) can make a deductible traditional IRA contribution regardless of how high your joint AGI might be

 

Example 1. You joined the Great Resignation to be a stay-at-home parent.

 

You and your working spouse file jointly and will have $200,000 of AGI for 2022. All the income is from your spouse’s job or self-employment. Your spouse participates in a tax-favored retirement plan. You don’t participate in any plan for 2022.

 

For the 2022 tax year, you as a non-working spouse can make a deductible contribution of up to $6,000 to a traditional spousal IRA set up in your name. Your joint AGI is below the $204,000 threshold for the phaseout rule, and your spouse supplies the requisite earned income. So, no worries.

 

If you will be age 50 or older as of December 31, 2022, you can contribute and deduct up to $7,000 for the 2022 tax year.

 

Variation. Now, say your joint AGI for 2022 is $250,000. You can’t make a deductible contribution to a traditional spousal IRA because your joint AGI exceeds the $214,000 top end of the deduction phaseout threshold. But you can make a non-deductible contribution regardless of how high your joint AGI might be.

 

Example 2. You and your working spouse have joint AGI of $800,000 in 2022, mostly from your spouse’s self-employment activity. Your spouse has no retirement plan, and you as a non-working spouse don’t participate in any plan for 2022. Despite your high joint AGI, you can make a deductible traditional spousal IRA contribution of up to $6,000 for the 2022 tax year, or up to $7,000 if you will be age 50 or older as of December 31, 2022

 

Working Spouse: Traditional IRA Contributions

 

If neither you nor your working spouse participate in a tax-favored retirement plan, via a job or self-employment, your working spouse can make a deductible contribution of up to $6,000 for the 2022 tax year to a traditional IRA set up in his or her name (regardless of your joint AGI level), or up to $7,000 if your working spouse will be 50 or older as of December 31, 2022.

 

You as a non-working spouse can make a deductible contribution to a traditional spousal IRA set up in your name, subject to the same limits.

 

But you and your spouse must together have enough earned income to at least match the combined amount of your contributions. All the requisite earned income can come from your working spouse. Once again, note that taxable alimony received by you or your spouse under a pre-2019 divorce agreement counts as earned income for IRA contribution eligibility purposes.

 

On the other hand, if your working spouse participates in a tax-favored retirement plan, his or her ability to make a deductible traditional IRA contribution for the 2022 tax year is phased out between joint AGI of $109,000 and $129,000.

 

Example 3. You and your working spouse will have $175,000 of joint AGI for 2022. All the income is from your spouse’s job, and your spouse is covered by a qualified retirement plan at work. For the 2022 tax year, your spouse cannot make a deductible traditional IRA contribution because your joint AGI exceeds the $129,000 top end of the phaseout range that applies to your spouse.

 

But your spouse can make a non-deductible contribution to a traditional IRA, subject to the applicable contribution limit of $6,000 or $7,000. You (the non-working spouse) can make a deductible contribution of up to $6,000 to a traditional spousal IRA set up in your name, because your joint AGI is below the $204,000 threshold for the deduction phaseout rule that applies to you. If you will be age 50 or older as of December 31, 2022, you can contribute and deduct up to $7,000.

 

Traditional IRA Contributions If Both You and Your Spouse Work

 

What if both you and your spouse work?

 

If you both participate in tax-favored retirement plans, the most restrictive AGI-based traditional IRA deduction phaseout range of $109,000 to $129,000 applies to both you and your spouse for the 2022 tax year

 

Example 4. Both you and your spouse work, and you both participate in tax-favored retirement plans. For 2022, your joint AGI will be $150,000. At this AGI level, neither you nor your spouse can make a deductible traditional IRA contribution for the 2022 tax year, because your joint AGI exceeds the $129,000 top end of the deduction phaseout range.

 

But if your joint AGI is $109,000 or below for 2022, you can make a deductible contribution of up to $6,000, or $7,000 if you will be age 50 or older as of December 31, 2022. Ditto for your spouse.

 

Finally, what if both you and your spouse work but only one of you participates in a tax-favored retirement plan?

 

In that scenario, the participating spouse’s ability to make a deductible traditional IRA contribution for the 2022 tax year is limited by the restrictive $109,000-to-$129,000 deduction phaseout range. The non-participating spouse falls under the more liberal $204,000-to-$214,000 deduction phaseout range.

 

Example 5. Both you and your spouse work. Your spouse participates in a tax-favored retirement plan, but you don’t. For 2022, your joint AGI will be $200,000.

 

Your spouse cannot make a deductible traditional IRA contribution for the 2022 tax year, because your joint AGI exceeds the $129,000 top end of the phaseout range that applies to your spouse. But your spouse can make a non-deductible contribution of up to $6,000, or $7,000 if your spouse will be age 50 or older as of December 31, 2022.

 

You can make a deductible contribution, because your joint AGI is below the $204,000 starting point for the deductible contribution phaseout range that applies to you. You can contribute and deduct up to $6,000, or $7,000 if you’ll be age 50 or older as of December 31, 2022.

 

Roth IRA Contributions

 

With Roth IRAs, deductibility is not an issue. You make contributions with after-tax dollars and are subject to the same annual contribution limits as traditional IRAs. The Roth IRA tax-saving payoff is on the back end.

 

You can withdraw all your Roth account earnings, along with the sum of your annual contributions, federal-incometax-free after age 59 1/2 as long as you’ve had at least one Roth IRA open for over five years. Roth IRA withdrawals that pass these tests are called qualified distributions, and they are one of the best breaks in our beloved Internal Revenue Code.

 

But eligibility to contribute to a Roth IRA for the 2022 tax year is phased out between joint AGI of $204,000 and $214,000 for a married, joint-filing couple.

 

Also, you must have enough earned income to at least match the combined amount of Roth contributions by you and your spouse. All the requisite earned income can come from one spouse. Taxable alimony received under a pre-2019 divorce agreement counts as earned income for Roth IRA contribution eligibility purposes

 

Importantly, the Roth contribution privilege is unaffected if you or your spouse participates in a tax-favored retirement plan.

 

Finally, understand that the annual IRA contribution limit for the tax year in question is the combined limit for traditional IRA contributions (whether deductible or not) and Roth IRA contributions. So, if you contribute the maximum to a Roth IRA, you can’t contribute anything to a traditional IRA. If you contribute the maximum to a traditional IRA, you can’t contribute anything to a Roth IRA.

 

Takeaways

 

You now have the lowdown about traditional and Roth IRA contributions for married, joint-filing couples—whether only one spouse works or both do.

 

The traditional IRA contribution rules get a bit complicated if you or your spouse participates in a tax-favored retirement plan via a job or self-employment. You have those rules in this article.

 

You have until April 17, 2023, to make IRA contributions for the 2022 tax year. But the sooner you contribute, the sooner you can start earning tax-deferred income with a traditional IRA or tax-free income with a Roth IRA.

 

 

August 11, 2022 | DWHuff Consulting

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