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TaxWatch: Spousal IRAs: a tax-smart way to save for retirement when one spouse isn’t working

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One probable result of the Great Resignation is more stay-at-home moms and dads. And more folks without kids who stay at home too. Whether your stay-at-home status is temporary or permanent, you might not want to take a break from saving for retirement in a tax-favored way by making contributions to a traditional or Roth spousal IRA. Your working mate can make contributions too. Here’s the deal.

The nonworking spouse: traditional IRA contributions

For the 2022 tax year, a nonworking spouse can make a deductible traditional IRA contribution of up to $6,000 or up to $7,000 if you are age 50 or older as of 12/31/22. However, you must file a joint return, and the working spouse must have earned income that equals or exceeds the sum of the nonworking spouse’s contribution plus the working spouse’s contribution, if any. 

If the working spouse is covered by a tax-favored retirement plan, via a job or self-employment, the deductibility of the nonworking spouse’s contribution is phased out for the 2022 tax year between joint adjusted gross income (AGI) of $204,000 and $214,000. 

If the working spouse is not covered by a tax-favored retirement plan, via a job or self-employment, the nonworking spouse can make a deductible traditional IRA contribution regardless of how high the joint AGI might be.  

Joint AGI is the sum of all taxable income items and gains reduced by so-called above-the-line deductions such as the ones for up to $250 of unreimbursed expenses for K-12 educators, contributions to a health savings account (HSA), moving expenses for members of the Armed Forces, the deductible part of self-employment tax, contributions to self-employed SEP, SIMPLE, and qualified retirement plans, health insurance premiums for self-employed people, alimony payments required by pre-2019 divorce agreements, and up to $2,500 of student loan interest. 

Example 1: You’ve joined the Great Resignation to be a stay-at-home parent. You and your working spouse file jointly and will have $200,000 of AGI this year. All the income is from your spouse’s job. Your spouse participates in a tax-favored retirement plan at work. For 2022, you don’t participate in any plan. For the 2022 tax year, you as the nonworking spouse, can make a deductible contribution of up to $6,000 to a traditional IRA set up in your name. Your joint AGI is below the $204,000 threshold for the phase-out rule, and your spouse supplies the requisite earned income. So, you’re good to go. If you’ll be age 50 or older as of 12/31/22, you can contribute and deduct up to $7,000 for your 2022 tax year. 

The working spouse: traditional IRA contributions

If neither you nor your spouse participate in a tax-favored retirement plan through a job or self-employment, you and your spouse can each make a deductible traditional IRA contribution of up to $6,000 for the 2022 tax year, regardless of your joint AGI level. Or up to $7,000 if you’ll be 50 or older as of 12/31/22. Ditto for your spouse. The only limitation is that you must have enough earned income to at least match the combined amount of your contributions. All the requisite earned income can come from the working spouse. 

Example 2: Your joint AGI is $400,000, mostly from your working spouse’s self-employment activity. Your spouse has no retirement plan, and you don’t participate in any plan for 2022. You can make a deductible traditional IRA contribution of up to $6,000 for the 2022 tax year, or up to $7,000 if you’ll be age 50 or older as of 12/31/22. Ditto for your spouse.

If your working spouse participates in a tax-favored retirement plan, your spouse’s ability to make a deductible traditional IRA contribution for the 2022 tax year is phased out between joint AGI of $109,000 and $129,000.

Example 3: You and your working spouse file jointly and will have $200,000 of joint AGI this year. All the income is from your spouse’s job, and your spouse is covered by a qualified retirement plan at work. For the 2022 tax year, you as the nonworking spouse, can make a deductible contribution of up to $6,000 to a traditional IRA set up in your name. Your joint AGI is below the $204,000 threshold for the phase-out rule that applies to you. If you’ll be age 50 or older as of 12/31/22, you can contribute and deduct up to $7,000 for the 2022 tax year. 

Your working mate cannot make a deductible traditional IRA contribution, because your joint AGI exceeds the $129,000 top end of the phase-out range that applies to your spouse. However, your spouse can make a non-deductible contribution to a traditional IRA, subject to the aforementioned contribution limits.

Roth IRA contributions

With Roth IRAs, deductibility is not an issue. Contributions are made with after-tax dollars (no deductions) and are subject to the same annual contribution limits as traditional IRAs. The Roth IRA tax-saving advantage is on the back end. You can withdraw all your Roth account earnings, along with the sum of your annual contributions, federal-income-tax-free after age 59 1/2, as long as you’ve had at least one Roth IRA open for over five years. Roth IRA withdrawals that pass these tests are called qualified distributions, and they are one of the nicest tax breaks in our beloved Internal Revenue Code.   

However, there are AGI-based limits on annual Roth contributions. Eligibility to contribute to a Roth IRA for the 2022 tax year is phased out between joint AGI of $204,000 and $214,000 for a married joint-filing couple. Also, you must have enough earned income to at least match the combined amount of Roth contributions by you and your spouse. All the requisite earned income can come from the working spouse. Participating in a tax-favored retirement plan, or not, has no impact on the Roth IRA contribution privilege.  

Finally, you must understand that the $6,000/$7,000 contribution limit is the combined limit for traditional IRA contributions (whether deductible or not) and Roth IRA contributions for the 2022 tax year. So, if you contribute the max to a Roth IRA, you can’t contribute anything to a traditional IRA. If you contribute the max to a traditional IRA, you can’t contribute anything to a Roth IRA.

Strategy: If your AGI is too high to make a deductible traditional IRA contribution but low enough to make a Roth contribution, make the Roth contribution instead of making a non-deductible traditional IRA contribution. Reason: you can withdraw accumulated Roth account earnings as federal-income-tax-free qualified distributions (assuming you pass the tests for qualified distributions) In contrast, earnings that accumulate in a traditional IRA, including one that was funded with nothing but non-deductible contributions, are fully taxable when withdrawn.        

The bottom line

There you have it: the story on IRA contributions for a nonworking spouse, when you file jointly.    

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