Generally speaking, Individual Retirement Accounts can only be set up by an individual for their own use, and on the basis of their own earnings. For example, you probably well aware of the IRS regulations that require a retirement saver to have at least as much earned income as they want to contribute to their IRA in a given tax year.
The situation is considerably more flexible for married couples. In fact, if you’re married then there are some easy to use strategies you can use to help your spouse maximize their IRA contributions each and every year.
Use Your Joint Earned Income to Help a Non-Earning Spouse Maximise IRA Contributions. Married couples who file joint tax returns have significant advantages available to them compared to what their financial situation would be if they were unmarried. For example, an unmarried individual who has either no earned income in a given year or a very small amount of earned income is significantly limited in what they can contribute to their IRA. But if that same person is married, then they and their spouse are eligible to make contributions to their IRAs up to the amount of their joint earned income.
Higher Deductibility for the Higher Earning Spouse. Note that it’s not just a non-earning or low-earning spouse who benefits from married tax filing status. For example, a married individual who earns significantly more than his or her spouse will be eligible for tax-deductible contributions to a traditional at a much higher income level.
For example, if the higher earning spouse is covered by a work retirement plan (such as a 401(k)) then they would only be able to make a completely tax-deductible contribution to a traditional IRA if the couple’s modified adjusted gross income is $95,000 or less. But if that same individual were single, the cut off for a fully tax deductible contribution would be $59,000. So the higher earning spouse benefits significantly from their marital status when it comes time to make deductible contributions.
Higher Eligibility for Roth Contributions for the Higher Earning Spouse. The same type of benefit exists when it comes to being eligible to make contributions to a Roth IRA. The higher earning spouse would be eligible to make a maximum contribution to a Roth IRA if the couple’s income is less than $178,000. But if that person were single, they would only be able to make a maximum contribution if their income were less than $112,000.
The ability of a married couple to use their joint modified adjusted gross income for purposes of the earned income requirements for IRA contributions is a significant benefit. Even if only one spouse works, both should try to maximize their annual contributions to their own IRAs, so that the couple can reap double the benefit (and have the maximum flexibility in their withdrawal strategy) when they reach retirement age.
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