Limits on Contributions to Spousal IRA
The same annual limits apply to IRAs, whether established on behalf of a spouse or not. For tax years 2021 and 2022, you can contribute up to $6,000 to a traditional IRA, or $7,000 if you are age 50 or older, as long as your taxable compensation is at least that much.
The additional $1,000 contribution is a catch-up contribution designed to help people save more as they approach retirement age. Married couples can contribute up to $12,000 to two IRAs, or $14,000 if they are age 50 or older.
Limits on Deductions for Spousal IRA
Just like other traditional IRAs, couples can deduct the full contribution to a traditional spousal IRA from federal taxes in tax years 2021 and 2022 if they are not covered by a defined contribution plan, like a 401(k) or IRA, or a defined benefit plan, such as a pension plan offered by an employer.
You may be considered covered by a plan if any contributions are made to your account.
If you are covered by any of these employer-sponsored retirement plans, the amount you can deduct for your contribution to a spousal IRA depends on your modified adjusted gross income (MAGI).
For the tax year 2021, the following ranges apply:
– If your modified adjusted gross income as a married couple filing jointly is … you can take …
– $105,000 or less a full deduction up to the allowed contribution limit
– More than $105,000 but less than $125,000 a partial deduction
– $125,000 or more no deduction
For the tax year 2022, the income thresholds will be as follows:
– If your modified adjusted gross income as a married couple filing jointly is … you can take …
– $109,000 or less a full deduction up to the allowed contribution limit
– More than $109,000 but less than $129,000 a partial deduction
– $129,000 or more no deduction
Differences for Roth Spousal IRAs
The contribution limit for Roth accounts is the same as for traditional IRA accounts: your total contributions to traditional and Roth IRAs cannot exceed $6,000 in tax years 2021 and 2022 (or $7,000 if you are age 50 or older).
However, Roth accounts receive different tax treatment. Unlike traditional IRAs, which are funded with pre-tax contributions and can therefore be deducted from taxes, Roth IRA contributions are not tax-deductible because they are funded with after-tax contributions.
Furthermore, the withdrawal you eventually make from a Roth IRA will not be taxed again, whereas traditional IRA withdrawals are subject to tax.
Your ability to contribute to a Roth IRA for yourself or your spouse depends on your modified adjusted gross income (MAGI).
Here are the contribution limits for tax year 2021:
– If your modified adjusted gross income as a married couple filing jointly is … you can contribute …
– Less than $198,000 up to $6,000 ($7,000 if you are age 50 or older)
– $198,000 or more but less than $208,000 a reduced amount
– $208,000 or more no contribution allowed
The contribution limits for Roth IRAs for tax year 2022 will be as follows:
– If your modified adjusted gross income as a married couple filing jointly is … you can contribute …
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Less than $204,000 up to $6,000 ($7,000 if you are age 50 or older)
– $204,000 or more but less than $214,000 a reduced amount
– $214,000 or more cannot contribute
Penalties for Excess Contributions to Spousal IRA
You may have made excess contributions if:
– You contributed more than the allowable contribution limit
– You made an ineligible transfer to an IRA
In these cases, a 6% annual excise tax will be imposed on the excess amount as long as it remains in the IRA, up to a maximum tax of 6% of the total value of all your IRAs at the end of the year.
The best way to avoid paying the tax is to withdraw any excess contributions from the IRA by the due date of your tax return, and withdraw any earnings on the excess contributions.
Spousal IRA Contribution Deadlines
Although it’s easy for people to make regular contributions throughout the year, you do not have to do this to take advantage of spousal IRA benefits. You can make one lump-sum contribution up until the due date of your tax return for that specific tax year.
Frequently Asked Questions (FAQs)
How do RMDs work with a spousal IRA?
The required minimum distributions (RMDs) for a spousal IRA are the same as for a standard IRA. A spousal IRA is owned by the spouse, so the RMDs will depend on the age of the spouse. Roth IRAs are not subject to required minimum distributions unless inherited. This can apply to a spouse who inherits their partner’s IRA after they become widowed, but it will not apply to spousal IRAs.
What are the rules for converting a spousal IRA to a Roth IRA?
Converting an IRA involves changing the type of account to take advantage of different tax benefits. This can be done with any traditional IRA, including a spousal IRA. Inherited IRAs can also be converted to Roth IRAs. Remember that converting to a Roth IRA will trigger taxes on all the funds moved from a traditional pre-tax IRA to a post-tax Roth IRA. Some may find that the benefits of long-term tax-free growth outweigh the immediate tax consequences. Others may prefer to keep the IRA as is, to avoid that tax bill.
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Sources:
– Internal Revenue Service. “IRA FAQs.”
– Internal Revenue Service. “Traditional and Roth IRAs.”
– Internal Revenue Service. “Retirement Topics – IRA Contribution Limits.”
– Internal Revenue Service. “IRA Deduction Limits.”
– Internal Revenue Service. “Income Ranges for Determining IRA Eligibility Change for 2021.”
– Internal Revenue Service. “IRS Announces 401(k) Limit Increases to $20,500.”
– Internal Revenue Service. “Traditional and Roth IRAs.”
– Internal Revenue Service. “Amount of Roth IRA Contributions That You Can Make for 2021.”
– Internal Revenue Service. “Amount of Roth IRA Contributions That You Can Make for 2022.”
– Internal Revenue Service. “Retirement Plan and IRA Required Minimum Distributions FAQs.”
Source: https://www.thebalancemoney.com/spousal-ira-contribution-limits-4040575
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