A likely result of the Great Retreat is more stay-at-home moms and dads. And more people without children who are also staying at home. Whether your stay-at-home status is temporary or permanent, you may not want to take a break from tax-deferred saving for retirement by making contributions to a traditional or Roth spouse IRA. Your work colleague can also make contributions. That’s the deal.
Non-working spouse: traditional IRA contributions
For tax year 2022, a nonworking spouse can make a deductible traditional IRA contribution of up to $6,000, or up to $7,000 if you are 50 years of age or older on 12/31/22. However, they must file a joint statement and the working spouse must have an income equal to or greater than the sum of the non-working spouse’s contribution and the working spouse’s contribution, if any.
If the working spouse is covered by a tax-privileged pension scheme, through employment or self-employment, the deductibility of the non-working spouse Contribution will be phased out for tax year 2022 between the combined adjusted gross income (AGI) of $204,000 and $214,000.
If the working spouse is not covered by a tax-advantaged pension plan, the non-working spouse can make a deductible traditional IRA contribution, no matter what the joint AGI may be.
Joint AGI is the sum of all taxable items of income and profits, reduced by so-called above-the-line deductions, such as Military relocation expenses, self-employed tax deductible portion, SEP, SIMPLE, and qualifying self-employed pension contributions, self-employed health insurance premiums, alimony due to pre-2019 divorce settlements, and up to $2,500 in student loan interest.
Example 1: You have joined the Great Resignation to be a stay-at-home parent. You and your working spouse file together and have $200,000 AGI this year. All income comes from your spouse’s job. Your spouse participates in a tax-privileged pension scheme at work. For 2022 you are not participating in any plan. For the 2022 tax year, as a non-working spouse, you may make a deductible contribution of up to $6,000 to a traditional IRA established in your name. Your joint AGI is below the $204,000 phase-out threshold and your spouse is providing the required employment income. So you’re good to go. If you are 50 or older as of 12/31/22, you can contribute and deduct up to $7,000 for your 2022 tax year.
The working spouse: traditional IRA contributions
If neither you nor your spouse participates in a tax-advantaged retirement plan through a job or self-employment, you and your spouse may each make a deductible traditional IRA contribution of up to $6,000 for tax year 2022, regardless of your joint AGI level. Or up to $7,000 if you are 50 or older on 12/31/22. The same goes for your spouse. The only restriction is that you must have enough earned income to cover at least the total amount of your contributions. All required earned income can come from the employed spouse.
Example 2: Your joint AGI is $400,000, mostly from your working spouse’s self-employment. Your spouse does not have a retirement plan and you are not participating in a 2022 plan. You can make a deductible traditional IRA contribution of up to $6,000 for tax year 2022, or up to $7,000 if you are 50 years of age or older as of 12/31/22. The same goes for your spouse.
If your working spouse participates in a tax-advantaged retirement plan, your spouse’s ability to make a deductible traditional IRA contribution for tax year 2022 will be phased out between the combined AGI of $109,000 and $129,000.
Example 3: You and your working spouse file together and will receive $200,000 in joint AGI this year. All income comes from your spouse’s work, and your spouse is covered at work by a qualifying retirement plan. For the 2022 tax year, as a non-working spouse, you may make a deductible contribution of up to $6,000 to a traditional IRA established in your name. Your combined AGI is below the $204,000 threshold for your expiration rule. If you are 50 or older as of 12/31/22, you can deposit and deduct up to $7,000 for tax year 2022.
Your co-worker cannot make a deductible traditional IRA contribution because your joint AGI exceeds the high end of your spouse’s $129,000 phase-out range. However, your spouse may make a non-deductible contribution to a traditional IRA, subject to the contribution limits above.
Roth IRA Contributions
With Roth IRAs, deductibility is not an issue. Contributions are made in dollars after tax (without deductions) and are subject to the same annual contribution limits as traditional IRAs. The Roth IRA tax savings benefit is on the tail end. You can withdraw all of your Roth account earnings along with the total of your annual contributions free of federal income tax after age 59 1/2 as long as you have had at least one Roth IRA open for over five years. Roth IRA withdrawals that pass these tests are called qualified distributionsand they are one of the finest tax breaks in our beloved Internal Revenue Code.
However, there are AGI-based caps on annual Roth contributions. Eligibility to contribute to a Roth IRA for the 2022 tax year will expire between a joint AGI of $204,000 and $214,000 for a joint filing married couple. You must also have sufficient earned income to cover at least the sum of the Roth contributions made by you and your spouse. All required earned income can come from the employed spouse. Whether or not you participate in a tax-advantaged retirement plan does not affect the Roth IRA contribution privilege.
Finally, you must understand that the $6,000/$7,000 contribution limit is the combined limit for traditional IRA contributions (whether deductible or not) and Roth IRA contributions for the 2022 tax year. So if you contribute the maximum to a Roth IRA, you cannot contribute anything to a traditional IRA. If you contribute the maximum to a traditional IRA, you cannot contribute anything to a Roth IRA.
Strategy: If your AGI is too high to make a deductible Traditional IRA contribution but low enough to make a Roth contribution, make the Roth contribution instead of making a non-deductible Traditional IRA contribution. Reason: You may withdraw accumulated Roth account earnings as federal income tax exempt qualifying distributions (provided you pass qualifying distribution tests). deductible contributions are fully taxable upon withdrawal.
The final result
There you have it: the story about IRA contributions for a non-working spouse if you file jointly.
https://www.marketwatch.com/story/the-tax-smart-way-to-make-ira-contributions-when-one-spouse-isnt-working-11648502185?rss=1&siteid=rss The tax-wise way to make IRA contributions when a spouse isn’t working