The Spousal IRA Opportunity
Tax-friendly IRAs were devised as an incentive for workers to set aside money for retirement, so the maximum an individual can contribute annually is limited to the amount of his or her earned income. This limitation once left stay-at-home parents and other nonworking spouses without a way to keep their own retirement savings on track.
The spousal IRA rules were eventually changed to allow a working spouse to contribute to the IRA of a spouse who earns little or no income. This provision might benefit a couple when one spouse is working and the other is not, whether the nonworking spouse is a student, raising children, unemployed, or even retired.
When making spousal contributions, you have the same choice between the up-front tax deduction associated with a traditional IRA or tax-free withdrawals offered by a Roth IRA. Either way, there’s still time to make IRA contributions for the 2015 tax year: The deadline is April 18, 2016 (a three-day delay from the usual deadline).
Contributing to the IRA of a nonworking spouse offers married couples a chance to double up on retirement savings and might also provide a larger tax deduction than contributing to a single IRA.
An individual with earned income can contribute up to $5,500 to his or her own IRA and up to $5,500 more to a spouse’s IRA, as long as the couple’s combined income exceeds both contributions and they file a joint tax return. An additional $1,000 catch-up contribution can be made for each spouse who is age 50 or older.
All other IRA eligibility rules must be met. So if a spousal contribution is made to a traditional IRA, the nonworking spouse must be under age 70½ in the year for which the contribution is made. There are no age limits for contributions to a Roth IRA.
Traditional IRA Deductibility
If neither spouse actively participates in an employer-sponsored retirement plan such as a 401(k), contributions to a traditional IRA are fully tax deductible. However, if one or both are active participants, federal income limits may affect the deductibility of contributions.
For married couples filing jointly, the ability to deduct contributions to the IRA of an active participant is phased out if their modified adjusted gross income (MAGI) is between $98,000 and $118,000. There are higher phaseout limits when the contribution is being made to the IRA of a nonparticipating spouse: MAGI between $183,000 and $193,000 in 2015 ($184,000–$194,000 in 2016). Thus, some participants in workplace plans who earn too much to deduct an IRA contribution for themselves may be able to make a deductible IRA contribution to the account of a nonparticipating spouse.
Traditional IRA withdrawals are taxed as ordinary income and may be subject to a 10% federal income tax penalty if withdrawn prior to age 59½, with certain exceptions as outlined by the IRS.
The Roth Option
Eligibility to contribute to a Roth IRA phases out at higher modified AGI levels ($183,000–$193,000 for married couples filing jointly in 2015; $184,000–$194,000 in 2016).
Roth IRA contributions are made with after-tax funds, so they can be withdrawn without penalty at any time, for any reason. Withdrawals of earnings are also tax-free, regardless of how much growth the account experiences, if they meet the five-year holding requirement and take place after age 59½, or result from the owner’s death or disability.
Annual required minimum distributions (RMDs) from traditional IRAs must begin for the year in which the account owner reaches age 70½. Original Roth IRA owners are not subject to RMDs.