Ignoring the Spousal IRA?

Image of a family of four sitting on a couch in their living room. The mom and dad are on their phones. The two sons seated between them are on laptops. Behind them is an elephant with SPOUSAL IRA graffitied on its side in yellow.

What’s a Spousal IRA?

A spousal IRA is a traditional retirement account a spouse can contribute to despite earning little or no income.

It’s an often overlooked retirement account.

Contributing to a spousal IRA may help a couple:

  • lower their taxable income

  • reduce their taxes

  • save for retirement

One spouse may earn a high income while the other doesn’t. Given the cost of childcare, it’s especially common for families with children.

One spouse may:

  • work a part-time job or

  • dedicate themselves to managing the household.

Orange background. A man and a woman both wearing plain white tee shirts look surprised and excited at each other. "Could we even do that?" is written at the top in black font.

People Assume They’re Not Eligible

Couples with income over $100,000 often assume they can’t benefit from these accounts.

It mostly depends on whether the spouse is covered by a retirement plan at work.

No Income

If a spouse doesn’t earn income, they’re probably not covered by a workplace plan.

However unlikely, it’s possible a former employer may continue to make retirement plan contributions on their behalf!

Little Income

Lower wage and part-time positions have less access to retirement plans.

According to a study done in March 2023 by the U.S. Bureau of Labor Statistics, civilian access to retirement benefits varies by income:

Brick background. Access to Retirement Benefits by Wage Group title. Horizontal pink bar chart. Lowest 10 percent: 39%. Lowest 25 percent: 49%, Second 25 percent: 79%, Third 25 percent: 83%, Highest 25 percent: 92%, Highest 10 percent: 93%

Someone with a wage in the top 10% is about two and a half times more likely to have access to workplace retirement benefits than someone in the bottom 10%! 😮

If someone wanted to reduce wealth inequality, this seems like a good place to start.

Are Spousal IRA Contributions Deductible?

Whether a spousal IRA contribution will reduce taxable income depends on:

  1. whether the spouse is covered by a retirement plan at work

  2. how much the married, filing jointly couple earns

Title: Is a 2023 Spousal (Traditional) IRA Contribution Deductible? If the spouse is covered by a workplace plan, the couple would need to earn less than $116,000. If not covered, the couple would need to earn less than $218,000.

Spouse Covered by a Retirement Plan at Work

The married filing jointly income limit if the spouse is covered by a retirement plan at work is:

  • 2023: $136,000, and it’s phased out starting at $116,000

  • 2024: $143,000, and it’s phased out starting at $123,000

Spouse NOT Covered by a Retirement Plan at Work

The married filing jointly income limit if the spouse is NOT covered by a retirement plan at work is:

  • 2023: $228,000, and it’s phased out starting at $218,000

  • 2024: $240,000, and it’s phased out starting at $230,000

The income used for these limits is Modified Adjusted Gross Income (MAGI).

Income Requirement

Man in a white shirt doing a pushup with a boy and girl on his back who are also wearing white shirts. They're on a carpeted floor in their home - likely a living room. Words in black font ask: "Does the spouse need earned income?"

Wait, wouldn’t the spouse need earned income?

Nope! As long as the working spouse has enough income to cover their retirement plan contributions AND those of their spouse, they’re fine.

Let’s say someone earns $200,000. Their spouse takes care of their two young children and doesn’t have earned income.

No problem! The stay at home dad could still contribute to a traditional IRA and get a deduction on their joint tax return.

The maximum 401(k) employee contribution in 2023 was $22,500. That leaves $177,500 ($200,000 - $22,500) to contribute to the traditional IRA.

That Was So Last Year

Why do you keep talking about 2023?

Dark blue background. A sparkler on the right is lit and shining brightly. Tan text says "Miss something?" in the lower-left.

Trust me. I didn’t celebrate the New Year so hard that I forgot it happened!

A cool thing about IRA contributions? Americans have until their tax filing deadline to contribute for the previous year.

A 2023 contribution can be made up to 4/15/2024!

A couple might still be able to grow their retirement account(s) and their upcoming tax refund. They would need to specify 2023 for the traditional IRA contribution.

Account Ownership

Who owns the account?

The “Individual” in “Individual Retirement Arrangement” matters. They aren’t owned jointly.

Regardless of who contributes funds to the account, the person whose name is on the account owns it.

Age Is Irrelevant

Isn’t there a limit on how old someone can be and contribute to an IRA?

Not anymore!

The limit used to be 70.5. However, that limit was removed for 2020 and later.

There also isn’t a minimum age requirement. A teen who works a summer job could contribute (or have a parent contribute) to their Roth or traditional IRA account!

Contribution Limits

Isn’t the amount that can be contributed low?

The maximum contribution for traditional (and Roth) IRA for those 50 years old and younger is:

Someone who’s at least 50 years old can make an extra $1,000 catch-up contribution.

True - that’s far below the employee 401(k) contribution limit of:

However, it’s well above the individual limits for another attractive option - the Health Savings Account (HSA):

Roth vs. Traditional

Rocker in front of a red wall. Man in a gray suit in front of a gray wall. BATTLE OF THE IRA in yellow at top. VS in white in the middle. Roth in front of the rocker. Traditional in front of the business man.

As good as the traditional IRA is, there may be a better option in some situations.

Unlike traditional IRA contributions, Roth contributions don’t lower taxable income for the year they’re made.

However, funds withdrawn from a Roth IRA aren’t taxed if criteria are met.

Purple background. IRA Features title. Lowers taxable income: X Roth, check Traditional; Grows tax advantaged: check Roth and Traditional; Withdrawals are tax free: check Roth, X Traditional; Requires minimum distributions: X Roth, check Traditional

Lowers Taxable Income the Year Contributed

With a traditional IRA, contributions generally lower taxable income for the year. However, they won’t be deductible if income exceeds the limits.

Roth IRA contributions don’t reduce taxable income in the year they’re made.

Grows Tax Advantaged

Fortunately, neither traditional nor Roth IRA accounts are taxed annually:

  • Traditional IRA accounts typically grow tax-deferred

  • Roth IRA accounts typically grow tax-free

This saves on both the hassle and tax cost. In addition, interest and dividends earned in those accounts are reinvested. They may start to grow exponentially!

Two major exceptions are:

  1. required minimum distributions and

  2. inheritance.

We’ll explore those later.

Withdrawals are Tax-Free

Because the Roth IRA account owner paid taxes on the front end, they may never be taxed again! Withdrawals will be tax-free if certain requirements are met.

A common metaphor is a fruit tree. Is the seed or fruit taxed?

  • With a traditional IRA, the seed is not taxed yet the fruit is.

  • It’s the opposite for a Roth IRA. The seed is taxed and the fruit isn’t.

Brown background. Image of seeds on the left and apples on the right. Roth IRAs Taxed On: (arrow to seeds). Traditional IRAs Taxed On: (arrow to apples).

Roth IRA withdrawals come out in the following order:

  1. Contributions - can be withdrawn tax and penalty free at essentially any time.

  2. Conversions - generally need to be withdrawn at least five years after they’re converted and after someone turns 59.5.

  3. Earnings - would be taxed if withdrawn either less than five years after the account was funded or before age 59.5.

Unless an exception is met, a 10% penalty would apply if contributions and/or earnings are withdrawn before age 59.5. The same penalty applies to early traditional IRA withdrawals.

Requires Minimum Distributions (RMDs)

The U.S. Government gets impatient with traditional IRAs. Someone received a tax break year or even decades ago.

It’s time to pay!

Many people would prefer to never take money out of their traditional IRA accounts. The IRS forces them to with Required Minimum Distributions (RMDs).

The government would prefer to have traditional IRA owners distribute their entire balance before they die.

How much must be withdrawn each year is based on age. The older someone is, the larger the percentage they must take out each year. It’s based on life expectancy tables.

People are now living longer. Fortunately, the age someone must start taking Required Minimum Distributions (RMDs) has also increased.

  • The current age is 72.

  • However, it’s planned to rise to 75 by 2033.

Image of a dark palace. White text at the bottom of the page says "RMDs: The New Aristocracy."

Typically, people subject to Required Minimum Distributions (RMDs) have done well. They don’t really need to use these retirement accounts to fund their living expenses.

Roth IRAs aren’t subject to annual Required Minimum Distributions.

That makes sense! The government received its taxes years ago.

Roth Use Cases

There are many potential scenarios for Roth IRA contributions, including:

  • Income Expected to Rise: Younger workers tend to earn less than they will later. Since tax rates are progressive, it may make sense to pay the taxes now instead of later.

  • No State Income Tax: Earners who live in an income tax free state like Texas or Washington and plan to move might be ahead to pay the income taxes now. Doing so could avoid state income taxes later!

  • Inheritance: If someone were to leave a traditional IRA to a family member when they pass, that person would have to pay income taxes! The timing could be especially bad if the heir is in their peak earning years. Inherited Roth IRA aren’t really subject to income taxes.

Other Cash Needs

Someone needs to be able to contribute to an IRA.

Other things which often take priority include:

  • living expenses - including child support and alimony

  • taxes - especially back taxes

  • high interest credit debt

  • business expenses

  • emergency fund

  • insurance premiums

  • matched retirement plan contributions

  • discounted stock purchases…

Everyone’s situation is unique.

Must Be Eligible

This assumes the couple can contribute to a Roth IRA!

Unlike with a traditional IRA, the limits don’t depend on whether the spouse is covered by a retirement plan at work. What matters is the couple’s income.

The Roth IRA income limits for a married couple filing jointly are:

  • 2023: $228,000, and it’s phased out starting at $218,000

  • 2024: $240,000, and it’s phased out starting at $230,000

It’s Worth Checking

Even if previously unable to contribute to a Roth IRA or deduct a traditional IRA contribute, it’s worth checking. Things change!

Image of two donkeys in the snow. The title at the top says "Don't Assume"

If you’d like help determining whether a spousal IRA contribution is right for you…

Disclaimer

In addition to the usual disclaimers, neither this post nor this image includes any financial, tax, or legal advice.

Kevin Estes | Founder | Scaled Finance

Kevin Estes is a financial planner helping T-Mobile employees and their families live their best lives.

He worked in T-Mobile Financial Planning & Analysis for nine years and has extensive experience with T-Mobile’s compensation and benefits package. He received a certificate in financial planning from Boston University, passed the CERTIFIED FINANCIAL PLANNER™ exam, and founded Scaled Financed in 2022.

About | LinkedIn | Contact

https://www.scaledfinance.com/
Previous
Previous

Potential Financial Steps for T-Mobile Employees in February

Next
Next

Your Last Career Will Be Investor