Creating Spousal IRA - non ROTH - Need advice

[Camping]

Thinking of setting up a Spousal IRA and need some advice.


Some reasons why;
1. To minimize state income tax as we plan on moving to a tax-free state after retirement. State and local income tax rate is around 8%.
2. Last years we owed on our taxes, so I'd like to find a tax shelter in order not to have to make payments during the year to the State and IRS (to avoid penalties). We have money in CDs with different credit unions, different mature dates, each earning around 2.5% or so on average. This income puts our taxable earnings higher.
3. We are in our mid 50s and expect retirement in 3 years, so we won't have to wait long to start taking contributions. We expect to be living/domiciled in a tax free state before turning 59.5.
4. We have surplus of earnings so would not miss the contributions.



For 2018 tax year, joint filing:
One spouse's taxable income level was around $120K (Including around $3,800 of unearned income from CDs).

The other, not employed, had around $3,800 of unearned income (CDs maturing in 2018, all CDs monies are joint ownership).
We expect a higher amount of unearned income this year as more CDs mature.


Additionally, the unemployed spouse has a 401k from a prior part-time employment from 10 years ago, it's value is very low (just over $1k). We are unsure the status of this 401k, I think it was removed from the employer's 401k and may have been put into an IRA of the employees choosing. (I will look into this).


What I would like to do is put that prior 401k(now IRA?) into the newly made Spousal IRA. I would put the max amount of contribution (including catch-up) into the Spousal IRA for 2019 tax (and 2020, 2021). I would like to create one with one of my credit unions for convenience. The main earner has less than 3 years of employment before retirement, but with max contribution I believe it would add up and minimize State income taxes while deferring Fed Taxes.


Thoughts, Suggestions, Advice, all welcomed and appreciated. Thank You

 

[bingybear]

Thinking of setting up a Spousal IRA and need some advice.


Some reasons why;
1. To minimize state income tax as we plan on moving to a tax-free state after retirement. State and local income tax rate is around 8%.
2. Last years we owed on our taxes, so I'd like to find a tax shelter in order not to have to make payments during the year to the State and IRS (to avoid penalties). We have money in CDs with different credit unions, different mature dates, each earning around 2.5% or so on average. This income puts our taxable earnings higher.
3. We are in our mid 50s and expect retirement in 3 years, so we won't have to wait long to start taking contributions. We expect to be living/domiciled in a tax free state before turning 59.5.
4. We have surplus of earnings so would not miss the contributions.



For 2018 tax year, joint filing:
One spouse's taxable income level was around $120K (Including around $3,800 of unearned income from CDs).

The other, not employed, had around $3,800 of unearned income (CDs maturing in 2018, all CDs monies are joint ownership).
We expect a higher amount of unearned income this year as more CDs mature.


Additionally, the unemployed spouse has a 401k from a prior part-time employment from 10 years ago, it's value is very low (just over $1k). We are unsure the status of this 401k, I think it was removed from the employer's 401k and may have been put into an IRA of the employees choosing. (I will look into this).


What I would like to do is put that prior 401k(now IRA?) into the newly made Spousal IRA. I would put the max amount of contribution (including catch-up) into the Spousal IRA for 2019 tax (and 2020, 2021). I would like to create one with one of my credit unions for convenience. The main earner has less than 3 years of employment before retirement, but with max contribution I believe it would add up and minimize State income taxes while deferring Fed Taxes.


Thoughts, Suggestions, Advice, all welcomed and appreciated. Thank You

Last year you owed taxes really means you under with held.

The spousal IRA is just your spouse's IRA where contributions are allowed based you your earnings. You can not setup a spousal IRA, your spouse needs to set it up (sign for it).

The question of what is best to do depends on your marginal tax rate now, estimated tax rate +penalties later and how soon you will need to access these retirement accounts.

Remember that you and your spouse can each have a TIRA. The IRS considers all TIRAs in an individual's name as one TIRA.

Often it is beneficial to use retirement accounts. However, which is best depends of individual situations. Funding a TIRA for your spouse is is likely a good idea if I guess your situation.

I have a friend that would have benefited from funding a spousal IRA, but he would not use his money to fund it because then it would be her money.

 

[gwraigty]

I would like to create one with one of my credit unions for convenience.

Thoughts, Suggestions, Advice, all welcomed and appreciated. Thank You

There's nothing especially inconvenient about opening one online with any brokerage. You'll have a wide range of investment options to choose from. You can stick with brokered CDs (no commissions on new issues) if you want. We have our Roth IRAs with Fidelity.

If you're concerned about a 2.5% taxable yield increasing your taxes, you can get about that in tax-exempt muni funds/ETFs. But don't do that in your IRAs.

 

[kaneohe]

............................
We expect a higher amount of unearned income this year as more CDs mature.


.......................................:

Are all your CDs for 1 yr or less? You seem to associate maturity w/ income.
Typically for CDs w/ terms over 1 yr, income is paid every yr,not just at maturity.

This is probably not relevant to your situation since the non-working spouse does not have a retirement plan and can deduct the TIRA contribution. The working spouse,however, if they have a retirement plan, does have a limit on how much they can deduct if income is too high.
https://www.irs.gov/pub/irs-pdf/p590a.pdf

 

[Camping]

Thanks for everyone's replies



To add some more information;


The withholding amount is the highest with 0 dependents claimed, even thought we are a two person family. I don't know if it's possible to have even more money withheld by the employer.



The wage earner has their own IRA, called a TSP (Thrift Savings Plan) with the max contributions allowed (incl catch-up) being applied. The employer also contributes. I don't know if this is the same as described as an IRA, as the earner will have more than 121K AGI next year, so perhaps the contribution is not tax deductible? I do know that the amount taken out of the paycheck for the TSP is not taxed. I wonder if with the rules I read (the IRS pdf link provided above) applies to the TPS, meaning if a Spousal IRA is open, then the wage earner will lose the tax benefits of contributing to their IRA/TSP?



CD values;

We sold a modest house last year (which we had paid cash for a few years earlier) that money is now in a 2yr CD that was started last year around September (the amount is around 30% of our total CD values). The house sale CD (with a bank) didn't pay out last year (we usually get paid once a month with the credit unions CDs). With the amount we have in CDs we should have been getting a greater interest income than we got last year.


So I have to figure out if the TSP is different from an IRA in regard to allowing a tax free Spousal IRA when the AGI is above $121K.

 

[Sunset]

OP - I'm surprised you haven't already had an IRA for both you and your spouse, along with a ROTH for each of you.

I personally would have your spouse set up the IRA and a ROTH at a brokerage , check them out, and you will see many of the big name ones charge zero fees to set up, and maintain the accounts.

The reason is you will get fantastic choice and extremely low fees on the ETF's/funds you chose.

Vanguard is a good choice, since you won't be trading often in the new accounts, and you can phone them for hand-holding.

Transferring the money is not hard, either.
No way would I set up an account at my local bank, as that is not their specialty.

 

[kaneohe]

.......................................

The withholding amount is the highest with 0 dependents claimed, even thought we are a two person family. I don't know if it's possible to have even more money withheld by the employer.



The wage earner has their own IRA, called a TSP (Thrift Savings Plan) with the max contributions allowed (incl catch-up) being applied. The employer also contributes. I don't know if this is the same as described as an IRA, as the earner will have more than 121K AGI next year, so perhaps the contribution is not tax deductible? I do know that the amount taken out of the paycheck for the TSP is not taxed. I wonder if with the rules I read (the IRS pdf link provided above) applies to the TPS, meaning if a Spousal IRA is open, then the wage earner will lose the tax benefits of contributing to their IRA/TSP?



CD values;

We sold a modest house last year (which we had paid cash for a few years earlier) that money is now in a 2yr CD that was started last year around September (the amount is around 30% of our total CD values). The house sale CD (with a bank) didn't pay out last year (we usually get paid once a month with the credit unions CDs). With the amount we have in CDs we should have been getting a greater interest income than we got last year.


So I have to figure out if the TSP is different from an IRA in regard to allowing a tax free Spousal IRA when the AGI is above $121K.

You can withhold more on your W4 by specifying an additional amount per pay period on line 6.

I believe the TSP is the Fed equivalent of a 401K ..........it is not an IRA.......
so it is handled as a salary reduction for tax purposes (effectively a deduction of sorts as it is not currently taxed). If the wage earner had an IRA,in addition, it probably would not be deductible.

Sorry I wasn't more specific about that link........on p.13 there is one table for the wage earner and another for the non-working spouse. The 121K limit pertains to the wage earner who has a retirement plan at work. The other table is for the non-working spouse.......the limit on MAGI there is 189K so it sounds like the spousal contribution should be deductible.

Curious about that CD.......so you didn't get a 1099 reporting interest for it?

 

[Camping]

OP - I'm surprised you haven't already had an IRA for both you and your spouse, along with a ROTH for each of you.

I personally would have your spouse set up the IRA and a ROTH at a brokerage , check them out, and you will see many of the big name ones charge zero fees to set up, and maintain the accounts.

The reason is you will get fantastic choice and extremely low fees on the ETF's/funds you chose.

Vanguard is a good choice, since you won't be trading often in the new accounts, and you can phone them for hand-holding.

Transferring the money is not hard, either.
No way would I set up an account at my local bank, as that is not their specialty.

Thank you for that advice. We never really thought about IRAs, believe that the TSP was the retirement savings (and same as an IRA) along with the fed pension.

You can withhold more on your W4 by specifying an additional amount per pay period on line 6.

I believe the TSP is the Fed equivalent of a 401K ..........it is not an IRA.......
so it is handled as a salary reduction for tax purposes (effectively a deduction of sorts as it is not currently taxed). If the wage earner had an IRA,in addition, it probably would not be deductible.

Sorry I wasn't more specific about that link........on p.13 there is one table for the wage earner and another for the non-working spouse. The 121K limit pertains to the wage earner who has a retirement plan at work. The other table is for the non-working spouse.......the limit on MAGI there is 189K so it sounds like the spousal contribution should be deductible.

Curious about that CD.......so you didn't get a 1099 reporting interest for it?

Thank you so much for that valuable information. The W4 additional with holdings (line 6) was something I overlooked. Additionally, after some thought I figured that the TSP was not the same as an IRA, your confirmation makes it clear, thanks You've been very helpful, thanks



The CD is with a local bank and we did not get a 1099 last year, nor any earnings. I just checked; The CD is described as "interest paid at maturity" and being a 2 year CD started in 2018 I expect that we'll get the interest in 2020, it is set at 2.75%.





Thanks

 

[Sunset]

OP - I think you can do both 401K and IRA contribution and get a tax deduction for each one.
The limits on the IRA are $6,000 per person in 2019 and unless you have high income are tax deductible and are unrelated to 401K contributions.
That's what we did

edited -> Ok with your income, instead of an IRA , put the money into a ROTH (I think you can do that).

Here IRS says your income is too high to get the IRA deduction, (can still do it, but since no deduction, a ROTH is simpler and better).
https://www.irs.gov/retirement-plan...-you-are-covered-by-a-retirement-plan-at-work

 

[Sunset]

Here IRS says you can contribute to the limit for ROTH (for each of you).
https://www.irs.gov/retirement-plans/amount-of-roth-ira-contributions-that-you-can-make-for-2019

 

[Camping]

Can anyone clarify/confirm?



I was reading the rules about setting up a spousal IRA and from what I understand, monies deposited in a spousal IRA would not be tax deductible due to the working spouses income:


https://www.irs.gov/newsroom/401k-c...to-19000-for-2019-ira-limit-increases-to-6000




This part:
For married couples filing jointly, where the spouse making the IRA contribution is covered by a workplace retirement plan, the phase-out range is $103,000 to $123,000, up from $101,000 to $121,000.


The working spouse (with employer sponsored retirement plan - TSP) will have a gross earned income of approximately 165K with about $10K+ or so in dividend income from CDs. The non working spouse will have around $10K+ or so in dividend income from CDs.


From what I understand from the wording in the IRS pub is that "spouse making the IRA contribution" means the working spouse putting the money in, and not the spouse who is creating the Spousal IRA, is that correct? Also, are the income levels gross amounts or taxable income (after deductions etc.)?


Thanks

 

[pb4uski]

It doesn't matter who puts the money in... the IRS considers you as one entity since you are filing jointly... and I agree that it looks like your income will exceed the phase-out range so any contributions would not be deductible, so it would be best to make the contribution to a Roth IRA rather than a traditional IRA.

Levels cited are modified AGI, not taxable income.

https://www.irs.gov/retirement-plan...-you-are-covered-by-a-retirement-plan-at-work

 

[Camping]

It doesn't matter who puts the money in... the IRS considers you as one entity since you are filing jointly... and I agree that it looks like your income will exceed the phase-out range so any contributions would not be deductible, so it would be best to make the contribution to a Roth IRA rather than a traditional IRA.

Levels cited are modified AGI, not taxable income.

https://www.irs.gov/retirement-plan...-you-are-covered-by-a-retirement-plan-at-work

Thanks for your reply and clarifying that AGI is the factor used.

 

[kgtest]

Roth IRA for you and spouse. Open one with Vanguard, call em or you can open them online as well. Invest in VTI or the entire market and don't look back. Contribute Jan 1 of 2020 as well.

I should take my own advice lol. With kids it's been tight to get that roth money but gotta do it.

 

[Camping]

Roth IRA for you and spouse. Open one with Vanguard, call em or you can open them online as well. Invest in VTI or the entire market and don't look back. Contribute Jan 1 of 2020 as well.

I should take my own advice lol. With kids it's been tight to get that roth money but gotta do it.

Perhaps I am missing something, but other than earnings on a ROTH being tax delayed, I don't see a benefit over putting taxed monies into a CD.

 

[gwraigty]

Perhaps I am missing something, but other than earnings on a ROTH being tax delayed, I don't see a benefit over putting taxed monies into a CD.

Earnings (and capital gains) in a Roth aren't tax delayed. They're tax exempt, under current law. Interest/dividends/capital gains (losses) are not reported on your tax return. RMDs are also not required for the account owner/spousal beneficiary. Roth withdrawals (when you meet the age criteria) are not taxable.

ETA this link that explains the benefits of a Roth IRA vs. an IRA:

https://www.fidelity.com/retirement-ira/ira-comparison

 

[SevenUp]

Can anyone clarify/confirm?

I was reading the rules about setting up a spousal IRA and from what I understand, monies deposited in a spousal IRA would not be tax deductible due to the working spouses income.

The working spouse (with employer sponsored retirement plan - TSP) will have a gross earned income of approximately 165K with about $10K+ or so in dividend income from CDs. The non working spouse will have around $10K+ or so in dividend income from CDs.

From what I understand from the wording in the IRS pub is that "spouse making the IRA contribution" means the working spouse putting the money in, and not the spouse who is creating the Spousal IRA, is that correct?

No, that is not correct.

See 2019 IRA Deduction Limits - Effect of Modified AGI on Deduction if You Are NOT Covered by a Retirement Plan at Work | Internal Revenue Service

The spouse not covered by a retirement plan at work (but with a spouse who is) may deduct the full tIRA contribution if the MAGI for the MFJ return is less than $193K.

 

[Camping]

Earnings (and capital gains) in a Roth aren't tax delayed. They're tax exempt, under current law. Interest/dividends/capital gains (losses) are not reported on your tax return. RMDs are also not required for the account owner/spousal beneficiary. Roth withdrawals (when you meet the age criteria) are not taxable.

ETA this link that explains the benefits of a Roth IRA vs. an IRA:

https://www.fidelity.com/retirement-ira/ira-comparison

Thank you for clarifying and the link

The part about any earning being free of tax is the real benefit. However, it appears that one has to wait 5 year before taking a distribution (of the earnings).

Per the link:
"A distribution from a Roth IRA is federally tax-free and penalty-free provided that the five-year aging requirement has been satisfied and one of the following conditions is met: age 59½, qualified first time home purchase, or death."

Our ages are 57 & 55 this year, so this means not having access to it (earnings) until age 62 & 60 without penalty. However, we have around 2-2.5 years left of work, so a ROTH contribution would not be that long.The good part is the compounding affect of earnings also earning, all tax free (after 5 years).

 

[pb4uski]

.... Our ages are 57 & 55 this year, so this means not having access to it (earnings) until age 62 & 60 without penalty. However, we have around 2-2.5 years left of work, so a ROTH contribution would not be that long.The good part is the compounding affect of earnings also earning, all tax free (after 5 years).

Since Roth money is tax-free and once you take it out of tax-free you can't put it back in.... Roths are usually the last thing you would tap for retirement spending... better to leave them for your heirs unless you run out of tax-deferred money.

 

[Camping]

No, that is not correct.

See 2019 IRA Deduction Limits - Effect of Modified AGI on Deduction if You Are NOT Covered by a Retirement Plan at Work | Internal Revenue Service

The spouse not covered by a retirement plan at work (but with a spouse who is) may deduct the full tIRA contribution if the MAGI for the MFJ return is less than $193K.

OK, here's another wrench in the gears;


Spouse A is the employee with work sponsored retirement plan (TSP).
Spouse B has unearned income and does not contribute to a work sponsored retirement plan since 2009.



BUT


Spouse B still has a retirement plan from an employer who they left around nine years ago.


When they left, the employer insisted they rolled it over, but because the amount was so small ($800 or so) they never bothered. Plus, they didn't know how or where to roll it over. After a while, the employer put the account with T.RowePrice 2030 Adv. The employer was Central Texas College, it is now listed as a 'CTC Supplement Plan & Trust'. As mentioned earlier, there has been no contributions by either the employer or Spouse B since leaving in 2009.



My question, does the existence of the above retirement account count as an 'employee sponsored retirement account'?



If so, perhaps Spouse B could create an IRA and then roll over the CTC plan into it so there is no longer a work sponsored retirement plan.


The amount now is around $1,400, so would the spousal IRA contribution max amount be reduced by the roll over amount?



Thanks for your reply

 

[gwraigty]

My question, does the existence of the above retirement account count as an 'employee sponsored retirement account'?

Without looking it up, my guess would be No, as the spouse is no longer an employee.

 

[pb4uski]

+1

 

[SevenUp]

My question, does the existence of the above retirement account count as an 'employee sponsored retirement account'?

No. Things that happened only in previous tax years don't affect this determination in this tax year.

See Are You Covered by an Employer's Retirement Plan | Internal Revenue Service for the IRS version.

 

[SevenUp]

The amount now is around $1,400, so would the spousal IRA contribution max amount be reduced by the roll over amount?

No. Rollover and conversion amounts do not affect the annual contribution limits.

In terms of whether traditional or Roth will be better for you, what matters is the tax rate you can avoid this year by using traditional, compared with the tax rate you'll pay later when withdrawing from traditional. See Traditional versus Roth - Bogleheads for more.

 

[Camping]

No. Things that happened only in previous tax years don't affect this determination in this tax year.

See Are You Covered by an Employer's Retirement Plan | Internal Revenue Service for the IRS version.

No. Rollover and conversion amounts do not affect the annual contribution limits.

In terms of whether traditional or Roth will be better for you, what matters is the tax rate you can avoid this year by using traditional, compared with the tax rate you'll pay later when withdrawing from traditional. See Traditional versus Roth - Bogleheads for more.

Thanks SevenUp for your replies and the link.

A traditional IRA (Spousal) will help reduce this years tax liability as our earnings will be lower in retirement and we will move to an income tax-free State (current state is around 7.5%).

The next step is to create a Spousal IRA depositing the max ($7K for over 50yo) and then roll over the old retirement plan into it.