Considering how to fund an IRA for your nonworking spouse? There may be options if you qualify. One of the fallouts of the pandemic is that millions of people have left of the workforce. Women with families are taking the greatest hit of unemployment. And the worse of it is that while unemployed, these workers can’t contribute to their retirement through employers plans. However, married taxpayers may have an option to help reaccumulate those lost retirement savings.
A Nonworking Spouse May Qualify to Fund an IRA by Considering the Spousal IRA
One frequently overlooked tax benefit is the spousal IRA. Generally only taxpayers who have compensation can contribute to an IRA. In this case, “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. Spousal IRAs allow a nonworking or low-earning spouse to contribute to his or her own IRA as long as his or her spouse has adequate compensation.
The maximum amount that a nonworking or low-earning spouse can contribute is the same for a working spouse. That is, $6,000 for 2021. If the nonworking spouse is 50 years or older, that spouse can also make “catch-up” contributions, limited to $1,000. This raises 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 and makes $100,000. His W-2 for 2021 is $100,000. His wife Rosa, age 45, doesn’t work due to their difficulty finding childcare providers. Since her compensation (of zero) is less than the contribution limit for the year, Rosa can base her contribution on their combined compensation of $100,000. Thus, Rosa can contribute up to $6,000 to an IRA for 2021. Even if Rosa had done some part-time work and earned $2,500, she could still make a $6,000 IRA contribution.
The contributions for both spouses can be made either to a traditional or Roth IRA or split between them. But the combined contributions must not exceed the annual contribution limit. A taxpayer’s income is the determining factor for IRAs.
Looking to Fund an IRA? Currently, There are Two 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, there are limits. A taxpayer can only make a tax-deductible contribution to the IRA of the nonparticipant spouse if the couple’s AGI doesn’t exceed $198,000 in 2021. If the couple’s income is between $198,000 to $208,000, only a partial deduction is allowed. Once their AGI reaches $208,000, no amount is deductible.
Roth IRAs
Roth IRA contributions are never tax-deductible. Contributions to Roth IRAs are allowed if the couple’s AGI is below $198,000 in 2021. The contribution is ratably phased out for AGIs between $198,000 and $208,000. Thus, once the AGI exceeds $208,000, one can not make a contribution towards a Roth IRA for 2021.
Example:
Rosa from the previous example can designate her IRA contribution as either a deductible traditional IRA or a nondeductible Roth IRA. Rosa could contribute because the couple’s AGI is under $198,000. Had the couple’s AGI been $203,000, Rosa’s contribution would have been limited to $3,000 because of the phaseout. The other $3,000 could have been contributed to a traditional IRA and designated as nondeductible.
You can make contributions to your IRA for 2021, up until April 15, 2022.
Please give this office a call if you would like to discuss IRAs or need assistance with your retirement planning.
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