Cynthia Rivera, JD
Many of our financial decisions and future planning are borne out of love. To take care of those we love….is an ideal that permeates most of our daily thoughts and actions.
So, on this Valentine’s Day, amid the flowers and chocolates you may want to consider a nonconventional gift for your spouse – a spousal Individual Retirement Account (IRA).
A spousal IRA may not be considered a traditional Valentine’s gift, but the work, planning, thought and care that goes into funding and growing a spousal IRA can be rewritten as a love story. A testimony of present love and care for years to come.
In general, a person can contribute to a retirement account such as an IRA only if he or she has earned income. However, a special provision allows an income earner spouse to make a contribution to an IRA held in the name of a non-working spouse. The non-working spouse owns the assets in the spousal IRA. It is opened under her or his name and social security number. If you or your spouse are financially savvy romantics and meet the eligibility criteria, then a spousal IRA could be a perfect gift.
There are several requirements that must be met in order to make contributions to a spousal IRA: 1) you must be married, 2) file a joint income-tax return, and 3) have earned income of at least the amount you contribute to the IRA.
Thus, a working spouse can contribute this year’s annual contribution limit of $5,500 to his or her own IRA, plus another $5,500 into a spousal IRA, as long as the working spouse has earned at least $11,000. You can contribute up to an additional $1,000 to both accounts if you are age 50 or older.
Once you meet the eligibility requirements, a spousal IRA can be opened as a Traditional or Roth IRA. A spousal IRA must meet the same contribution, distribution and age requirements as those of a Traditional IRA or Roth IRA.
In a Traditional IRA, contributions are tax-deferred, but your distributions are taxed. Note that there are no income restrictions on your eligibility to contribute to a Traditional IRA. This means that you can contribute as much as you to want (up to the annual amount allowable) regardless of how much income you earn. However, there are income limitations on deducting Traditional IRA contributions. You can still contribute regardless of income, however, the contribution would be considered non-deductible.
Whether your contributions to a Traditional IRA can be fully or partially deducted on your income tax return, depends on your income tax filing status and whether you or your spouse participated in an employer’s qualified retirement plan.
A Traditional IRA contains an age limitation that prevents contributions from being made after the age of 70 ½. If you contribute to a Traditional IRA for your non-working spouse, remember that he or she must be under age 70½ for the year for which the contribution is being made. Traditional IRAs require a minimum distribution at 70 ½, meaning that your spouse must withdraw a minimum amount from this account each year, once he or she reaches this age.
If a Traditional IRA is not the best choice for your spouse then you may consider, alternatively, funding a Roth IRA.
Under a Roth IRA, your contributions are taxed while your distributions are tax-free. There is no age limit for Roth IRA contributions, but income eligibility requirements must be met. Unlike a Traditional IRA, not everyone is allowed to directly contribute to a Roth IRA. If you are considering a Roth IRA you need to make sure that you do not earn above the income limit.
A spousal IRA allows couples who are in high tax brackets to lower their tax liability. In addition to lowering the couple’s taxable income, a spousal IRA provides another venue to save for retirement. A married couple using this strategy can as much as double their annual IRA contributions. By funding your spouse’s IRA, you are also contributing to a higher quality of life during retirement, as you share your retirement assets.
The tax benefits that apply to Traditional and Roth IRAs, also apply to a spousal IRA. If you decide to contribute to your spouse’s IRA, note that these tax advantages have limitations and depend on your age, income, and the type of IRA you fund (Traditional IRA or Roth IRA).
A spousal IRA could be a great Valentine’s gift that embodies the notion of love and long-term commitment, while providing financial security during a couple’s retirement years.
Discuss your plans and eligibility requirements with your financial advisor, who can assist you with making the choices that are right for you. Happy Valentine’s Day!