Much of the emphasis on individual retirement accounts revolves around the deduction available to working individuals. IRA funding for the spouses of workers sometimes receives less attention. Nonworking spouses, however, can often fund a separate IRA based solely on the earnings of the working spouse.
Tax legislation passed in 2013 created the option for nonworking spouses to fund an IRA. The legislation was sponsored by U.S. Senator Kay Bailey Hutchison. In a rather unusual move for tax legislation, the IRA type was officially titled as the Kay Bailey Hutchison Spousal IRA. For practical reasons, it is often referred to simply as a spousal IRA.
Equal contribution potential
As the nonworking spouse, you may be able to contribute up to $5,500 annually to your own IRA. If your working spouse is not an active participant in an employer-sponsored retirement plan, your spouse can also contribute $5,500 to their own IRA. The individual limit increases to $6,500 for each tax filer age 50 or over. As with all IRAs, the total amount of contributions for a year cannot exceed the total amount of earnings for the year.
Modified AGI definition
If your working spouse participates in a company-sponsored retirement plan, your spouse is entitled to an IRA deduction only if your combined income is less than a specified threshold amount. Your combined income that is compared with the threshold is referred to as modified AGI. For many tax filers, modified AGI is close to the total amount of income reported on their tax return.
Working spouse deduction thresholds
If your working spouse is in a company retirement plan, they are entitled to a full IRA deduction only if your modified AGI is $98,000 or less. Because of the company retirement plan, their ability to deduct an IRA is gradually phased out at higher income levels. The deduction is no longer available when modified AGI reaches $118,000. For a nonworking spouse, however, the earning thresholds are considerably higher.
Nonworking spouse deduction thresholds
Even if your working spouse is not entitled to an IRA deduction, you may take a full deduction for a spousal IRA if your modified AGI is $183,000 or less. At that threshold, your allowable deduction begins to gradually phase out as income increases. The ability to deduct a spousal IRA completely disappears when your modified AGI reaches $193,000.
Effective retirement planning requires a series of many small decisions over an extended number of years. Contact a financial planning professional for more advice on IRA strategies.
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