September 22, 2017, 7:46 AM

What to Know about a Spousal IRA

By Michael P. Rose, CFP®, MST

If you would like to minimize the amount of income taxes you pay, one of the most effective ways to do so is by investing inside a “qualified” tax-advantaged savings account.  These accounts allow individuals to invest their savings for certain specified goals on a tax-free or tax-deferred basis. 

As part of the financial planning work we do with our clients, we regularly review how much money our clients are saving and investing, the goals for which they are doing so, and where they are investing.  We do not do this to be nosey.  Instead, we track this information to identify whether our clients are maximizing the extent to which they can invest in tax-advantaged savings accounts.  For example, though we find that most of our clients know to contribute the maximum amount allowed into their employer’s retirement plans, many aren’t aware of the other tax-advantaged investment accounts that may be available to them.  These accounts include 529 plans, Coverdell Education Savings Accounts, and Individual Retirement Accounts (IRAs), in addition to other, non-qualified, tax-deferred savings accounts such as non-qualified deferred compensation plans.

One of the most overlooked tax-advantaged savings accounts for purposes of making annual contributions is the Individual Retirement Account (IRA).  IRAs are often overlooked because of the income limitations that apply to one’s ability to contribute to them on a tax-deductible basis.  In many cases, however, clients can avoid this limitation by contributing to an IRA on a nondeductible basis and  then transferring those contributions into a Roth IRA, in effect enabling one to make contributions into a Roth IRA, albeit indirectly (a strategy often referred to as a backdoor Roth IRA contribution).  For this reason, contributing to an IRA can be one of the most effective ways to increase the amount that is invested annually, on a tax-advantaged basis.  Note, however, that from a tax perspective this strategy works best when the client does not already have other deductible IRA assets.  In such cases the entire non-deductible contribution amount would not be tax free in converting to a Roth.

There are a variety of considerations that must be made to determine if a “backdoor Roth IRA contribution” is possible for any particular individual, but more information about this useful strategy can be found in a recent blog post we wrote about the subject.

In addition to the limitations on the deductibility of IRA contributions, individuals also frequently run into the requirement that contributions are limited to the amount of “earned income” the individual received during the year.  This is where the concept of the “Spousal IRA” comes in to play.  At first glance, the “earned income” limitation would appear to prohibit non-working spouses from contributing into their own IRA, such as spouses staying at home to care for children or those that have retired earlier than their significant others, because they don’t earn income.  However, there is an exception to this rule called the “Spousal IRA” rule, which provides that a non-working spouse can count income earned by a working spouse for purposes of making an IRA contribution.  More information about the specific rules for non-working spouses can be found in IRS Publication 590 (https://www.irs.gov/pub/irs-pdf/p590a.pdf).

Although “Spousal IRA” contribution rules have little impact on the deductibility of the amount contributed, when combined with a “backdoor IRA contribution,” a “Spousal IRA” contribution can provide a very effective way to maximize the amount of money a couple can invest on a tax-deferred or tax-free basis.

 

Disclosure: Modera Wealth Management, LLC (“Modera”) is an SEC registered investment adviser with places of business in Massachusetts, New Jersey, Florida and Georgia.  SEC registration does not imply any level of skill or training.  Modera may only transact business in those states in which it is notice filed or qualifies for an exemption or exclusion from notice filing requirements.  For information pertaining to Modera’s registration status, its fees and services and/or a copy of our Form ADV disclosure statement, please contact Modera or refer to the Investment Adviser Public Disclosure Web site (www.adviserinfo.sec.gov).  A full description of the firm’s business operations and service offerings is contained in our Disclosure Brochure which appears as Part 2A of Form ADV.  Please read the Disclosure Brochure carefully before you invest or send money.

This article contains content that is not suitable for everyone and is limited to the dissemination of general information pertaining to Modera’s financial planning, investing and wealth management services.  Past performance is no guarantee of future results, and there is no guarantee that the views and opinions expressed in this presentation will come to pass.  Nothing contained herein should be interpreted as legal, tax or accounting advice nor should it be construed as personalized financial planning, tax, investing, wealth management or other advice.  For legal, tax and accounting-related matters, we recommend that you seek the advice of a qualified attorney or accountant.  This article is not a substitute for personalized financial or tax planning from Modera.  The content is current only as of the date on which the presentation was given.  The statements and opinions expressed are subject to change without notice based on changes in the law and other conditions. 

 

Share this article

September 21, 2017, 10:54 AM

Income in Respect of a Decedent

By Brian F. Sheahen, CPA, CFP®, MST

Most people are familiar with the saying, “nothing is certain in life except for death and taxes.” The often-overlooked tax concept of “income in respect of a decedent” or IRD is a particularly relevant financial planning topic associated with both death and taxes. It may not seem like a...

Read More