What would be the benefit to contributing to a spousal IRA?

[TrophyWife]

If our income is to high to make it tax deductible? Wouldn't it be better to just put it a regular index fund where it's accessible?


(Retired but husband still works to stash up a little more cash.)

 

[Lawrencewendall]

Your earnings in a traditional account will be taxed every year at your current bracket. In a Roth, it's taxed once and never again.

 

[Fedup]

You get twice the amount for Roth IRA. Even with Roth contribution, I'm sure there are some money left for after tax savings.

 

[TrophyWife]

You get twice the amount for Roth IRA. Even with Roth contribution, I'm sure there are some money left for after tax savings.

But wouldn't our income level keep us from putting it in a Roth? We are over the top where it phases out. This is where i get confused.

 

[TrophyWife]

..... Even with Roth contribution, I'm sure there are some money left for after tax savings.

(Confused)

 

[GrayHare]

If you are able to convert to Roth without paying much in taxes (i.e. if your taxable amount in traditional IRAs is zero or small), you should contribute to a traditional IRA and soon convert it to Roth. That makes subsequent growth tax free, instead of being subject to tax if you had left those same dollars in an ordinary non-retirement account.

 

[Fedup]

But wouldn't our income level keep us from putting it in a Roth? We are over the top where it phases out. This is where i get confused.

I would do non-deductible and then immediate Roth conversion.

 

[Fedup]

(Confused)

What I'm trying to say is that if you have money outside of IRA and 401k, it's best to put in Roth IRA, whatever the max amount is, because you will never have to pay a single dime in tax again. Right now, our Roth account has the lowest amount, then regular taxable account, then tax deferred account. I rather have more in Roth than the other two. With regular taxable account at least you get long term capital gain benefit. With tax deferred, you get nothing. No deduction for loss even.

 

[bada bing]

You need to investigate backdoor Roth conversions. The rules
have some tricks and traps in them, but basically it is a legal and
widely used way around the income limits on a direct Roth contribution.

The big hang up is it doesn't make sense if you have even somewhat
large balances in deductible IRA accounts. Only deductible IRA's count,
and a lot of people intentionally roll their deductible IRA balances into
401K's to shield the balance from pro rata rules to facilitate
backdoor Roth conversions.

Roth "space" is very valuable and a lot of people find it worth jumping
through some hoops to get as much $$ as possible shuttled under a
Roth umbrella.

 

[TrophyWife]

So does this sound right?
1.Day 1-open a spousal ira at vanguard (it's not deductible because our income is too high)

2.Day 2-Roll the spousal ira into a roth (we can't contribute to a roth because again our income is too high)

3. Day 3-Be happy because now I have paid taxes on the money and I have been able to bi-pass the roth rules and my money grows tax free.

But i have a traditional ira with about 14,000 so I have to do all that prorata stuff. This sounds complicated. Is it?

 

[Fedup]

So does this sound right?
1.Day 1-open a spousal ira at vanguard (it's not deductible because our income is too high)

2.Day 2-Roll the spousal ira into a roth (we can't contribute to a roth because again our income is too high)

3. Day 3-Be happy because now I have paid taxes on the money and I have been able to bi-pass the roth rules and my money grows tax free.

But i have a traditional ira with about 14,000 so I have to do all that prorata stuff. This sounds complicated. Is it?

You don't have to wait for day 2. You can do it immediately as long as you have the funds ready in a taxable account. But the key is no regular IRA, only 401k account, otherwise, you will have the headache of keeping track of it.

 

[GrayHare]

So does this sound right?
1.Day 1-open a spousal ira at vanguard (it's not deductible because our income is too high)

2.Day 2-Roll the spousal ira into a roth (we can't contribute to a roth because again our income is too high)

3. Day 3-Be happy because now I have paid taxes on the money and I have been able to bi-pass the roth rules and my money grows tax free.

But i have a traditional ira with about 14,000 so I have to do all that prorata stuff. This sounds complicated. Is it?

Basically that's it. If you wish you can also convert to Roth that $14000 during the same tax year, provided you are willing to pay the taxes due on that part, and able to do so with money from a non-retirement account. If you do so, during subsequent tax years you'll be able to repeat the backdoor Roth contribution and not have to worry about prorating since by then you'll have no other tIRA dollars.

 

[bada bing]

But i have a traditional ira with about 14,000 so I have to do all that prorata stuff. This sounds complicated. Is it?

Look up IRS form 8606 and instructions. It isn't too bad.

You can make non-deductible contributions and then convert them
at any time in the future when the tax implications might be less. In
particular, if you are within a few years of retirement and your plans
include converting IRA balances when your tax rates are less, you
would convert your non-deductible balances then. The downside is
that earnings in the interim would be considered deductible balances.

If you have a few more years with employment income where you
could do backdoor Roths, it is probably worth paying a tax expert
to work up a best case strategy.

A related but separate strategy is the mega backdoor Roth.
If your husband has access to a 401K that allows after tax contributions,
that would be another way to put an even larger amount of your savings
into a Roth.

 

[LOL!]

For some people it is complicated. For others it is not complicated. For some tax preparers it is complicated, too, so if you find it complicated, then using a paid tax preparer does not mean they will do the reporting of the two things on a Form 8606 correctly. The two things that get reported on the Form 8606 are
1. The nondeductible tIRA contribution and
2. The conversion of the tIRA to a Roth IRA.

BTW, you don't have to convert only the non-deductible contribution. You can convert the entire amount. You just have to figure out the taxable amount.

 

[Fedup]

If you convert right away, it works as a Roth contribution. This is how you go around the high income problem.

 

[donheff]

I missed this one. DW has about $30K of self employment income annually. We have been funding her Roth IRA at the max level permitted by this income ($6500). Can she simply fund my Roth with up to $6500 and count it against this income? Do the funds need to come out of a fund that is in her name only to document that it is her funding the Roth? That would necessitate us setting up a separate taxable account in her name since our existing taxable is joint. We don't want to roll over from a tax advantaged account since we are in a high tax bracket. Also, IIRC, we have been funding her Roth by exchanging from a joint account. Is that problematic as long as she has self employment income to support it?

 

[cathy63]

I missed this one. DW has about $30K of self employment income annually. We have been funding her Roth IRA at the max level permitted by this income ($6500). Can she simply fund my Roth with up to $6500 and count it against this income? Do the funds need to come out of a fund that is in her name only to document that it is her funding the Roth? That would necessitate us setting up a separate taxable account in her name since our existing taxable is joint. We don't want to roll over from a tax advantaged account since we are in a high tax bracket. Also, IIRC, we have been funding her Roth by exchanging from a joint account. Is that problematic as long as she has self employment income to support it?

Yes, she can just put $6500 into your Roth IRA. There's no need to do any special tracking and it's fine to transfer the funds straight from a jointly held taxable investment account into the Roth IRAs. That's exactly how we funded our IRAs for years and how I funded DH's last year when he was retired and I was still working. The IRS does not care which dollars went into the accounts, only that the total amount saved is less than or equal to the amount earned by working.