One frequently overlooked tax benefit is the spousal IRA. Generally, only taxpayers who have compensation can contribute to an IRA. The term “compensation” includes wages, tips, bonuses, professional fees, commissions, taxable alimony received, and net income from self-employment. Spousal IRAs are the exception to that rule as long as the spouse has adequate compensation. A spousal IRA allows a non-working or low-earning spouse to contribute to his or her own IRA.
The maximum amount that a non-working or low-earning spouse can contribute is $6,000 for 2020. This is the same as the limit for a working spouse. If the non-working spouse’s age is 50 or older, that spouse can also make “catch-up” contributions. These catch up contributions could raise the overall contribution limit to $7,000. These limits apply provided that the couple together has compensation equal to or greater than their combined IRA contributions.
Example: Tony has a job. His W-2 for 2020 is $100,000. His wife, Rosa, age 45, has a small income from a part-time job totaling $900. Since her own compensation is less than the contribution limit for the year, she can base her contribution on their combined compensation of $100,900. Thus, Rosa can contribute up to $6,000 to an IRA for 2020.
Both spouses can make contributions to a traditional or to a Roth IRA. Or contributions between the Roth or Traditional IRA can be split. But the split can only occur as long as the combined contributions don’t exceed the annual contribution limit. Caution: The deductibility of the traditional IRA and the ability to make a Roth IRA contribution are based on the taxpayer’s income.
Spousal IRA options
Traditional IRAs
- There is no income limit restricting contributions to a traditional IRA. However, if the working spouse is an active participant in any other qualified retirement plan, a tax-deductible contribution can be made to the IRA of the non-participant spouse only if the couple’s adjusted gross income (AGI) doesn’t exceed $196,000 in 2020 (up from $193,000 in 2019).
Roth IRAs
- Roth IRA contributions are never tax deductible. Contributions to Roth IRAs are allowed in full if the couple’s AGI doesn’t exceed $196,000 in 2020 (up from $193,000 in 2019). The contribution is ratably phased out for AGIs between $196,000 and $206,000. This number is up from a range of $193,000 to $203,000 in 2019. Thus, you may not contribute to a Roth IRA once the AGI exceeds $206,000.
Example continued from above:
Rosa can designate her IRA contribution as either a deductible traditional IRA or a nondeductible Roth IRA. This is because the couple’s AGI is under $196,000. Had the couple’s AGI been 201,000, Rosa’s allowable contribution would have been limited to $3,000 because of the phase-out. The other $3,000 could have been contributed to a traditional IRA and designated as non-deductible.
Please give this office a call if you would like to discuss IRAs or need assistance with your retirement tax planning.
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