Spousal IRA clarification needed......

[FreeAsTheBreeze]

I am retired and receive a pension. My husband is still working and we will be filing a joint return. Is it possible for me to purchase a Roth IRA using the rule that allows one to rely on their spouse's income? ( the so called spousal IRA) I know my pension does not qualify as earned income or eligible compensation for IRA purposes, but I cannot find anything that would prohibit me from using his income to purchase the so called spousal Roth IRA. Am I wrong? (sorry if this is a stupid question, but it did appear to me after reading the info I could find online that I might be eligible) Thanks for your help.

 

[MichaelB]

I think so as long as you meet the remaining eligibility requirements. No such thing as a stupid question, especially when it is about tax.

 

[sengsational]

I have been putting the max amount in my spouse's Roth for many years, and she hasn't worked outside the home in 20 years. The IRS hasn't arrested me yet, hehe. Besides, I'd just blame block tax cut software...it lets me do it.

 

[Alan]

I think so as long as you meet the remaining eligibility requirements. No such thing as a stupid question, especially when it is about tax.

+1

We made spousal IRA deposits during years when DW was not working.

 

[pb4uski]

+2

 

[kz]

DH works a part-time job (that he likes) which is enough "earned income" that we can contribute to his Roth and my spousal Roth each yr. As long as he likes his job we plan to continue this for a few more yrs.

 

[Trooper]

I unearthed this thread from a search. My particular question is:

I am w*rking and covered by an employer-sponsored retirement plan (401(k)).
My DW does not w*rk.
I know I can contribute $6500 (we are over 50) to a spousal IRA.
The deductibility depends on our MAGI. For married filing jointly, when the spouse (me) is covered by a retirement plan, the limit is $183K for a full deduction.

My question is: I do not know where my MAGI will fall for the year, but would like to open the spousal IRA now. If I contribute to a tIRA now and my MAGI is greater than $193K, can I switch the tIRA to a Roth IRA prior to year end?

 

[Animorph]

I think you would be able to recharacterize your contribution up until you file taxes for 2015. It's been a while since I looked at the income limit, but $193k sounds awfully close to the point where Roth contributions are limited as well.

However, since Roth is OK with you, you can probably do a backdoor Roth contribution. That is a non-deductible tIRA contribution, which you later (days or whatever) Roth convert. With a non-deductible tIRA contribution you only pay tax on whatever growth the tIRA had before the Roth conversion, not on your original contribution amount. And this gets around the income limits.

I think that would work pretty well in your case. You make the tIRA contribution any time, wait until tax time to see if it is deductible or not. If it's not deductible, Roth convert it. If it is deductible you can leave it as is.

The one gotcha with backdoor Roth conversions is that all tIRA's of the person that Roth converts (your spouse only, not you) are counted when determining the cost basis of the conversion. So if your DW has any tIRA funds for which you have taken a deduction, then you will have to pay some taxes when you Roth convert. Doesn't sound like that would apply this time if you are just opening a tIRA, but it might next year if this year's contribution is deductible and next year's turns out non-deductible. No disaster in that case, but you might end up paying taxes on roughly half the Roth conversion amount (the proportion of pre-tax to post-tax funds in all DW's tIRA's).

 

[Trooper]

Thanks for the informative response, Animorph. I just did a back-of-the-napkin AGI forecast and it looks like I will be over the $193K for 2015.

So...does a Spousal IRA still make sense in my case? If I make a tIRA contribution today and it turns out my AGI > $193K, does it just 'convert' to a non-deductible IRA?

 

[ronocnikral]

So...does a Spousal IRA still make sense in my case? If I make a tIRA contribution today and it turns out my AGI > $193K, does it just 'convert' to a non-deductible IRA?

The custodian of the Ira only cares trad/Roth. The ability and decision to deduct a contribution to an Ira is on form 1040, page 1. The deduction is taken, above the line, when you file your taxes.

 

[Animorph]

The custodian of the Ira only cares trad/Roth. The ability and decision to deduct a contribution to an Ira is on form 1040, page 1. The deduction is taken, above the line, when you file your taxes.

+1. And it's a phase out as well, so it might be partially deductible.

 

[Trooper]

But...when I go to withdraw the non-deductible money from the tIRA down the road, how do I not pay taxes on it (or pay taxes on just the gains)? I remember hearing something about a Form 8808.

 

[Sunset]

Right, you have to keep track of it, keep your records forever so you have proof.
I don't think you send in the 8808 anymore.

 

[ronocnikral]

But...when I go to withdraw the non-deductible money from the tIRA down the road, how do I not pay taxes on it (or pay taxes on just the gains)? I remember hearing something about a Form 8808.

You might be confused on how a non deductible Ira works. Withdrawal wise, it works the same as the deductible Ira. So there isn't really anything to keep track if you aren't converting.

And while we're on the subject, you are responsible keeping track of your basis in all these accounts. Keep your 5498's, and keep track of what was deducted.

 

[RE2Boys]

So...does a Spousal IRA still make sense in my case? If I make a tIRA contribution today and it turns out my AGI > $193K, does it just 'convert' to a non-deductible IRA?

How much, if any, a contribution to a T-IRA is deductible will be determined as part of preparing an accurate tax return for that year. If any portion of the contribution is not deductible, you will need to file a form 8606 (NOT 8808) declaring what your basis in your T_IRA is. The default, if not filed, is that the T_IRA is considered fully deductible and all withdrawals are taxable.

If in the future you decided to convert the T-IRA to a Roth IRA, the calculation of what part of the conversion is taxable is computed using the Form 8606.

The T-IRA custodian will not keep track of the basis for you, he does not have access to your tax returns. I've seen folks screw themselves good by not keeping track of this. If done accurately, your last filed 8606 will have the calculated basis.

Been doing this for 20 years.

 

[Trooper]

Thanks RE2Boys. I fully understand; I now need to decide whether the non-deductible tIRA makes sense in my case. The benefits of a tIRA are tax-deferral of gains, but I plan to be in a lower tax bracket upon my ER next year. So I may decide to just skip it.

 

[Rothman]

Trooper the back door Roth is a very good choice, if your spouse has no current IRA the contribution is all after tax convert it immediately to a Roth and there is no tax due, now your spouse's Roth IRA grows tax free forever with no required minimal withdraws. If you aren't sure of magi you can do this all up to 4/15 of the following year, but you must designate the year the contribution is intended for, meaning 2015 contribution in February 2016. The conversion and tax record is of the year converted so it would show up on 2016 taxes in this example. The thing to remember the Roth conversion tax is calculated based on the year end tIRA balance so if spouse has any pretax IRA balance at end of 2016 the tax is calculated on a prorated basis. This is really only a caution if a spouse were to roll over a 401k to a tIRA forgetting about the previous conversion in same calendar year.


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[Trooper]

Thanks Rothman for the good info. Unfortunately my DW has other tIRAs resulting from 401k rollovers and an inherited IRA from her dad. Given that we are only talking $6500 I may just put it into a taxable mutual fund such as VTSAX; seems a whole lot simpler. One of our goals was to take advantage of the recent market dip by plowing some cash back in.

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