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The Spousal IRA Opportunity

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Take advantage of this hidden marriage perk.


From our advisors at Freedom First Wealth Management.

Tax-friendly IRAs were devised as an incentive for workers to set aside money for retirement, so the maximum an individual can contribute annually is limited to the amount of his or her earned income. This limitation once left stay-at-home parents and other nonworking spouses without a way to keep their own retirement savings on track.

The spousal IRA rules were eventually changed to allow a working spouse to contribute to the IRA of a spouse who earns little or no income. This provision might benefit a couple when one spouse is working and the other is not, whether the nonworking spouse is a student, raising children, unemployed, or even retired.
When making spousal contributions, you have the same choice between the up-front tax deduction associated with a traditional IRA or tax-free withdrawals offered by a Roth IRA.


Marriage Perk

Contributing to the IRA of a nonworking spouse offers married couples a chance to double up on retirement savings and might also provide a larger tax deduction than contributing to a single IRA.

An individual with earned income can contribute up to the maximum amount allowable to his or her own IRA - and up to the maximum amount additionally to their spouse’s IRA, as long as the couple’s combined income exceeds both contributions and they file a joint tax return. An additional $1,000 catch-up contribution can be made for each spouse who is age 50 or older.

All other IRA eligibility rules must be met. So if a spousal contribution is made to a traditional IRA, the nonworking spouse must be under age 70½ in the year for which the contribution is made. There are no age limits for contributions to a Roth IRA.

Traditional IRA Deductibility

If neither spouse actively participates in an employer-sponsored retirement plan such as a 401(k), contributions to a traditional IRA are fully tax deductible. However, if one or both are active participants, federal income limits may affect the deductibility of contributions.

Traditional IRA withdrawals are taxed as ordinary income and may be subject to a penalty if withdrawn prior to age 59½, with certain exceptions as outlined by the IRS.


The Roth Option

Roth IRA contributions are made with after-tax funds, so they can be withdrawn without penalty at any time, for any reason. Withdrawals of earnings are also tax-free, regardless of how much growth the account experiences, if they meet the five-year holding requirement and take place after age 59½, or result from the owner’s death or disability. Note that eligibility to contribute to a Roth IRA phases out at higher modified adjusted gross income levels.
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Securities offered through LPL Financial, Member FINRA/SIPC. Insurance products offered through LPL Financial or its licensed affiliates. Investment Advice offered through Level Four Advisory Services, a registered investment advisor. Level Four Advisory Services, Freedom First Credit Union, Freedom First Wealth Management are separate entities from LPL Financial. The LPL Financial representative associated with this website may discuss and / or transact securities business only with residents of the following states: CA, DC, FL, MD, NC, SC, TX, VA, WA

The information in this article is not intended as tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent professional advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was written and prepared by Emerald. Copyright 2016 Emerald Connect, LLC.
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