Spousal IRAs: Often Overlooked, but Highly Effective
- Jointly filed tax returns
- The working spouse generates enough income to cover spouse contributions and theirs-if they make contributions for themselves
- No special account opening is necessary
- Standard contribution limits and income restrictions apply
If you happen to be in a household where one spouse is the only bread winner 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 nonworking spouse.
What is Necessary?
To make contributions for a spouse who is not working, the first step is to file joint tax returns. By filing the joint return, you allow the working spouses income to be applied to the none working spouse's income requirements. Next, make sure the working spouse generated enough income to cover not only any contributions they plan to make to an IRA for themselves, but also the amount they want to contribute their spouse's IRA.
There is no special IRA to open. No "Spousal IRA" designations. You can simply use any IRAs previously established. If you are just opening the IRA, a traditional or Roth registration will work fine. The contribution deadline will be April 15th of the following years tax filing.
What contribution type should you make? Traditional VS Roth
This will really depend on your family's dynamics. If the non-working spouse is typically in the workforce, or plans to join the workforce in the future, this could be an excellent opportunity to make use of the family's temporary lower income bracket and fund the Roth IRA. Since money going into a Roth is already taxed, you will have the opportunity to save money at tax bracket that is temporarily lower than the family's norm.
On the other hand, if they family would prefer to lower its current tax rate, 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 jointly 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, $196K in 2020 $198k in 2021. The phase out limits for 2020 are $196K to $206K. For 2021 those limits increase to $198K to 208K. Above $208K no 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 under used 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 best fit for you and your family.