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Form 926

Maximizing Retirement Savings with a Spousal IRA

Planning for retirement is a crucial aspect of financial management, and for married couples, utilizing a Spousal IRA can significantly enhance their retirement savings strategy. A Spousal IRA allows a working spouse to contribute to an Individual Retirement Account on behalf of a non-working or lower-income spouse. This powerful financial tool ensures that both partners can benefit from the tax advantages and growth potential of an IRA, even if one spouse has little or no earned income.

A Spousal IRA is not a distinct type of IRA but rather a designation that allows contributions to be made for a spouse. It can be set up as either a Traditional IRA or a Roth IRA, each offering unique tax benefits. For families with a single income earner, this option can help level the playing field, ensuring both spouses can build their retirement savings concurrently.

The importance of this financial strategy cannot be overstated. By leveraging a Spousal IRA, couples can potentially double their retirement contributions each year, significantly boosting their savings over time. The working spouse’s income is the primary requirement for contributing to both IRAs, ensuring that the couple maximizes their contribution limits and takes full advantage of available tax benefits.

What is a Spousal IRA?

A Spousal IRA allows a working spouse to contribute to an Individual Retirement Account (IRA) on behalf of a non-working or lower-income spouse. This arrangement is beneficial because it provides a way to maximize retirement savings and take advantage of tax benefits even when one spouse has little or no taxable income.

A Spousal IRA is a powerful tool for couples looking to enhance their retirement savings. To take advantage of this opportunity, certain eligibility criteria must be met. Understanding these requirements is crucial for ensuring compliance and maximizing benefits.

1. Marital Status

  • Married Couples: The couple must be legally married and file a joint tax return. This requirement ensures that both spouses are considered a single economic unit for the purpose of the IRA contributions.
  • Filing Jointly: Contributions to a Spousal IRA can only be made if the couple files a joint federal tax return. This filing status is essential because it combines the income of both spouses, allowing the working spouse’s income to be used for contributions to both IRAs.

2. Earned Income Requirement

  • Working Spouse’s Income: The working spouse must have sufficient earned income to cover the contributions to both their own IRA and the Spousal IRA. Earned income includes wages, salaries, commissions, bonuses and self-employment income.
  • Income Limitation: The total contributions to both IRAs cannot exceed the earned income of the working spouse for the year. For example, if the working spouse earns $12,000, the combined contributions to both IRAs cannot exceed $12,000, even though the individual contribution limits might allow for higher contributions if the income were sufficient.

3. Contribution Limits

  • Annual Limits: For 2023, the contribution limit is $6,500 per year for individuals under 50 and $7,500 for those 50 and older. These limits apply separately to each spouse’s IRA.
  • Age Consideration: There is no age limit for contributing to a Spousal IRA, as long as there is earned income. However, Traditional IRAs require individuals to start taking required minimum distributions (RMDs) at age 73 (or 72 if you turned 72 before December 31, 2022).

4. Type of IRA

  • Traditional IRA: Contributions to a Traditional IRA may be tax-deductible, but withdrawals are taxed as ordinary income. The deductibility may be limited if the working spouse is covered by a retirement plan at work.
  • Roth IRA: Contributions to a Roth IRA are made with after-tax dollars, meaning they do not reduce taxable income in the year of contribution. However, qualified withdrawals in retirement are tax-free.

5. Income Limits for Deductibility

  • Traditional IRA Deduction Limits: The ability to deduct contributions may be phased out or eliminated if the working spouse is covered by an employer-sponsored retirement plan and the couple’s combined income exceeds certain thresholds. For 2023, if the couple’s modified adjusted gross income (AGI) is less than $218,000, they can make the full contribution. The deduction phases out for AGI between $218,000 and $228,000 and no deduction is available if AGI exceeds $228,000​​.
  • Roth IRA Income Limits: For Roth IRAs, contributions are allowed in full if the couple’s combined AGI is less than $218,000. Contributions are phased out for AGI between $218,000 and $228,000 and are not allowed if AGI exceeds $228,000​​.

6. Legal and Documentation Requirements

  • Legal Documentation: The IRA must be set up in the name of the non-working or lower-income spouse. It cannot be a joint account.
  • Application and Identification: When setting up the IRA, personal identifying information such as names, Social Security numbers and household income details must be provided. The financial institution may require proof of identity and marital status.

Setting Up a Spousal IRA

Here are the steps involved in setting up a Spousal IRA:

  1. Financial Institution: A bank, brokerage or other financial institution that offers IRA accounts should be selected. Fees and investment options should be compared.
  2. Application: Necessary personal information including Social Security numbers must be provided and the required forms must be completed.
  3. Account: The funds should be transferred from a bank account to the IRA. Contributions can be made as a lump sum or through regular deposits.
  4. Investing the Funds: Investment options that align with the retirement goals should be chosen such as stocks, bonds or mutual funds.

Managing a Spousal IRA

After setting up a Spousal IRA, ongoing management is very important. This includes making regular contributions, monitoring investment performance and ensuring that contributions do not exceed income or IRS limits.

Tax Benefits and Considerations

The primary benefit of a Spousal IRA is the potential for tax-deferred or tax-free growth, depending on the type of IRA. Some key points are presented below:

  • Traditional IRA: Contributions may be tax-deductible, reducing taxable income in the year they are made. Withdrawals in retirement are taxed as income.
  • Roth IRA: Contributions are made with after-tax dollars, but qualified withdrawals are tax-free. This can be advantageous if you expect to be in a higher tax bracket in retirement.

It is also important to avoid exceeding contribution limits as excess contributions are subject to a 6% penalty per year until corrected.

Services Provided by Dimov Tax & CPA Services

Dimov Tax & CPA Services offers a range of services to help clients manage their Spousal IRAs effectively:

  • Consultation and Planning: Personalized advice on choosing the right type of IRA and determining the optimal contribution amount based on income and retirement goals.
  • Tax Preparation and Filing: Ensuring accurate reporting of IRA contributions and deductions on tax returns.
  • Investment Management: Assistance with selecting and managing investments within the IRA to maximize growth and minimize risk.
  • Compliance and Reporting: Ensuring adherence to IRS regulations and timely filing of required forms and documentation.

Conclusion

A Spousal IRA is a powerful tool for married couples looking to enhance their retirement savings while taking advantage of tax benefits. By understanding the rules, contribution limits and potential tax implications, couples can make informed decisions that support their long-term financial goals. Dimov Tax & CPA Services is here to provide expert guidance and support every step of the way, ensuring that clients can maximize their retirement savings and enjoy a secure financial future.

For more detailed information on Spousal IRAs and to schedule a consultation, visit our website or contact us directly.

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