• Thomas Schorn

Spousal IRAs are Highly Effective

Opening and contributing to your spouse's IRA is simple but usually overlooked.


To contribute to a spouse IRA you must file a joint tax return. The working spouse generates enough income to cover spouse contributions, and theirs-if they make contributions for themselves. No special account opening is necessary. The standard IRA contribution limits and income restrictions apply.


If you happen to be in a household where one spouse is the only breadwinner by choice, or one spouse is in-between jobs. Do not miss out on increasing the family's savings by making IRA contributions for the non-working spouse.


What is Necessary?

Joint tax returns are required to make contributions for a non-working spouse. The working spouse's income applies to the non-working spouse's income requirements by filing the joint return. Next, make sure the working spouse generated enough income to cover any contributions they plan to make to an IRA for themselves and the amount they want to contribute to their spouse's IRA.


How To

There is no unique IRA to open. No "Spousal IRA" designations. You can use any IRAs previously established or open a new traditional or Roth IRA. The contribution deadline will be April 15th of the following year's tax filing.


What contribution type should you make? Traditional VS Roth

The type of IRA contributed to will depend on your family's dynamics. Suppose the non-working spouse is typically in the workforce or plans to join the workforce in the future. In that case, this could be an excellent opportunity to make use of the family's temporary lower income bracket and fund the Roth IRA. Since Roth contributions are not deductible, you will have the opportunity to save money at a tax bracket that is temporarily lower than the family's norm.


On the other hand, if the family prefers to lower its current tax, making contributions to the Traditional IRA would allow for the dollar-for-dollar reduction in taxable income today. Additionally, If the working spouse's employer does not provide a retirement plan, both spouses can make the Traditional IRA contributions.


Restrictions and Limitation

There are no income limitations for Traditional IRA contributions. Regarding Roth contributions, married couples filing joint tax returns have to adhere to set income limits. The income scale used is the Modified Adjusted Gross Income, MAGI. It is as follows; Full Roth contributions can be made for years 2020 and 2021 if the family's income is below $196,000 in 2020 or $198,000 in 2021. The phase-out limits for 2020 are $196,000 to $206,000. For 2021 those limits increase to $198,000 to 208,000. Above $208,000, no Roth contributions are allowed.


The current contribution limits for both traditional and Roth IRAs are $6K before age 50 and $7k for ages 50 and up.


Finally, this overlooked and underused part of the tax code is a great way to enhance savings and smartly plan (when properly implemented). Make sure to consult with your financial planner and tax specialist on which IRA is the best fit for you and your family.

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