It's tax time! As you gather information for your tax filing, you may have heard about Spousal IRA contributions. How do they work, and are there benefits for you?
What is a Spousal IRA?
- A Spousal IRA is a strategy in which a working spouse contributes on behalf of a spouse who does not work or has little income.
Are Spousal IRA contributions made into an account that is different from a traditional or a Roth IRA account?
- Contributions to a spousal IRA are made into new or existing traditional or Roth IRA accounts. There is no special designation on the account that contributions were made according to spousal IRA rules.
- No matter which spouse actually funds the account, the account owner does not change.
What are the rules for contributing to a Spousal IRA?
- The couple must file as married filing jointly.
- One spouse must have enough earned income to cover the contributions for both spouses.
- Contribution limits follow standard rules. For 2021 and 2022, the limit is $6,000 per spouse, with an additional “catch-up” of $1,000 allowed if you are 50 years of age or older.
Are contributions to Traditional IRAs tax-deductible?
- Tax deduction rules for spousal IRA contributions are the same as for traditional IRA contributions.
- For married couples with only one spouse who works, the amount that can be deducted is based on whether the working spouse is covered by a retirement plan at work.
- If the working spouse is not covered by an employer's retirement plan, then the couple may deduct the full amount of their IRA contributions.
- If the working spouse is covered by an employer's retirement plan, then income limitations (based on "modified adjusted gross income") apply to deductibility.
- If income is $204,000 or less (for 2021), the full amount of contributions can be deducted.
- If income is $204,000 or more (for 2021), a partial or no deduction will be allowed.
Can a Spousal IRA contribution be made into a Roth IRA?
- Whether you can contribute or not to a Roth is based on income limitations.
- For 2021, for married couples filing jointly, if income is less than $198,000, contributions may be made up to the annual limit.
- If income is $198,000 or more, a reduced or no contribution is allowed.
As always, check with your tax advisor for advice concerning your particular circumstances. April 15th is just around the corner. Good luck with your taxes!
Terri Velgara, CFP®
Terri is a Financial Advisor and Director of Financial Planning at Rappaport Reiches Capital Management. She serves as a resource for our firm's advisors in designing plans that empower clients to achieve their personal and financial goals. Please connect with Terri below. She loves to talk about investing, financial planning, and family game nights!