By knowing the contribution limits, investors can maximize their spousal IRA for retirement. Here’s what investors need to know about spousal IRA contribution limits for 2019.
In this article:
- What Is Spousal IRA?
- Traditional IRA Contribution Limit for Spouses
- Roth IRA Contribution Limit for Spouses
- Saver’s Credit
- SIMPLE IRA
- Tax on Excess IRA Contribution
- Tax Deductions
- Spousal IRA Contribution Deadline
Know Your Spousal IRA Contribution Limits for 2019
What Is Spousal IRA?
Only by knowing one’s spousal IRA contribution limits can you avoid getting taxed for any excess payments. This also helps investors take advantage of any tax deduction.
As the annual contribution limit differs with every kind of IRA account one contributes to, and limits can vary depending on gross income, there are a lot of rules investors need to understand.
Read on to make sure you and your spouse’s retirement nest egg is secured and ready for the future.
What is Spousal IRA? It is the type of IRA that allows a working spouse to contribute to the individual retirement account of their partner who doesn’t have any work or earned income.
The IRS also categorically defines this earned income as taxable compensation. It, therefore, includes but is not limited to:
To qualify, the couple must have a tax filing status of “married filing jointly.” The couple’s combined contributions should not exceed their declared taxable compensation.
Non-spousal IRA is not a joint IRA, which means both can’t place their names on each other’s IRAs as owners. The law still treats them as individuals.
It still remains an excellent retirement strategy, however, since they can share their account distributions later.
It is also different from an inherited IRA, which a spouse (even the one after divorce) can inherit if they remain the account’s beneficiary.
Traditional IRA Contribution Limit for Spouses
What are the Traditional IRA limits? If one earns enough to contribute to their spouse’s retirement plan, they can contribute to their Traditional IRA with their own income.
Changes in the 2019 Traditional IRA Contribution Limits
Be aware, however, of the changes in IRA contribution limits for 2019.
- Investors 50 Years Old and Below — According to the IRS, investors can now contribute up to $6,000 if they’re 50 years old and below.
- Investors Older than 50 Years Old — If they’re older than 50 years old, IRA rules say they can place up to $7,000.
The difference, which is $1,000, accounts for catch-up contributions. Remember, older investors are on their final stretch to increasing their IRA assets for retirement.
These differ from the rules around limits for 2018.
- Back then, contributions should not exceed $5,500 if an investor is younger than 50 years old.
- If an investor is older than 50, the contribution limit was set at $6,500. This is similar to 2017’s limits.
Why Use a Traditional IRA for Non-Working Spouses
Two factors can affect one’s decision to use a Traditional IRA for non-working spouses:
- Age when they make the contributions
The income limits depend on whether one has an employer retirement plan (which will be discussed more later).
As for age, an investor can contribute to a spousal IRA only up to 70.5 years old. An investor can, however, do so if their spouse is younger than them.
The spouse is not exempt from taking the required minimum distributions (RMDs) by the time they reach 70.5 years old.
Roth IRA Contribution Limit for Spouses
The 2019 spousal IRA rules say one’s contributions for spousal Roth IRA are the same as those for Traditional IRA. It’s still $6,000 if the investor is below 50 years old and $7,000 if they’re over 50.
Like in the previous years, how much one can contribute or the Roth spousal IRA contribution limit depends on their modified adjusted gross income or AGI.
What is Adjusted Gross Income? This refers to one’s gross income minus the expenses and adjustments allowed by the IRS.
For 2019, a Roth IRA account holder can contribute up to the maximum limit if their modified AGI is less than $193,000. It then declines as their income increases and goes to zero if it is already more than $203,000.
- In 2018, one can file up to the limit of $5,500 (or $6,500 if 50 years and above) if the modified AGI is less than $189,000.
- If your AGI is more than $189,000 but less than $199,000, then your spousal IRA is reduced. If your AGI is more than $199,000, then your contribution is reduced to zero.
If a married couple’s AGI is $64,000 or less annually, then they qualify for a saver’s credit. The government helps individuals with low to moderate incomes save for retirement by giving them a tax break.
Some people may confuse a tax credit with a tax deduction. They are not the same.
- A tax deduction works like lowering the taxable income by the amount, which varies depending on the IRS rules.
- A tax credit gives the IRA owner the full value of the credit, which can be in the form of a tax refund. With Saver’s Credit, though, this is not the case, but it can still reduce how much they owe the IRS.
They can then use this tax break to apply for a retirement plan.
- For the tax year 2019, the credit rate is 50% of the contribution if the AGI is less than $38,500 for married couples filing jointly.
- Like in Roth IRA, the tax credit rate goes down as the AGI increases. It then goes to zero if the AGI is already more than $64,000.
- Based on the 2018 rules, a couple can deposit up to $4,000 in their retirement plan if their AGI is not more than $38,000.
As a bonus, these individuals may also claim earned income credit (EIC), and they can get both simultaneously.
With EIC, an investor may be able to not only reduce taxes with the credit but also get it as a tax refund unless they end up with a tax liability. For 2019, it can be as much as $6,557.
Who the Saver’s Credit Doesn’t Apply to
- This saver’s credit doesn’t apply to individuals who are below 18 years old and those who are dependents in another person’s income tax return.
- It is also not for full-time students (qualified as those who have full-time enrollment for at least five months).
- Most of all, it disqualifies people who already have a high income.
For businesses that have 100 employees or fewer, they can choose to offer an employer plan called SIMPLE IRA. SIMPLE here means savings incentive match for employees.
It works similar to 401(k) plans with a few significant differences. For instance, they have two options when it comes to their contribution.
- The employer’s retirement plan can either exactly match the employee’s contribution up to 3% of their salary; or
- Just get 2% flat rate from the income. It doesn’t matter whether the employee decides to participate in the plan.
Couples covered by the tax-favored SIMPLE IRA, whether they’re under an employer or are self-employed, can also start their spousal IRA contribution.
Under this plan, a couple can contribute up to $13,000 toward their retirement plan, based on the 2019 rules. This amount still excludes employer’s contributions.
Tax on Excess IRA Contribution
Investors may have to pay taxes on any excess spousal IRA contribution if they don’t monitor their retirement plan properly. These taxes occur if:
- One contributes more than the limit; or
- If they make an improper rollover to an IRA
In the same way, if either the account holder or the spouse is 70.5 years or older, they will be charged 6% in tax of the excess amount left in the IRA by the end of the year.
To avoid this, investors should make sure to make withdrawals on the excess money by your tax filing due date. The same goes for any excess income earned on the contribution.
A retirement plan can be tax deductible, but this is only if the AGI falls within a certain bracket.
For Investors Covered by a Work Retirement Plan
If an investor is covered by a retirement plan at work with an AGI of $101,000 or less, they can take full advantage of deductions come tax time.
A partial deduction will be given if the AGI is within the $103,000 to $123,000 range. No deduction will be given to an income of more than $123,000.
For Investors Not Covered by a Work Retirement Plan
If an investor is not covered by a retirement plan by their employer, they can deduct up to the full amount for a spousal IRA contribution as long as they do not exceed $203,000 in income. Their possible tax deduction phases out when the AGI is from $193,000 to $203,000.
One cannot deduct their contributions to Roth IRA. Investors would even have to pay their tax dues on Roth IRA funds before they can add them into their Roth account.
If an account holder is not covered by a retirement plan by their employer, they can deduct up to the full amount for their spousal IRA contribution as long as they do not exceed $189,000 in income.
Spousal IRA Contribution Deadline
It’s essential that investors deposit or pay their spousal IRA contribution on or before the due date. No extensions are allowed.
Due dates for IRA contributions for 2017 fell on April 17, 2018. The 2018 IRA filing, on the other hand, had to be completed by April 15, 2019.
What retirement plan do you have for you and your spouse? Make sure you know your spousal IRA contribution limits to avoid being taxed for any excess amount.
Additionally, always monitor your contributions, whether you’re filing them yourself, or they’re being deducted by your employer. Remember, it pays to stay updated about your retirement plan.
IRA contributions for non-working spouses, however, can be tricky. When in doubt, always ask for professional tax advice.
After all, the goal is to save as much as you can for retirement.
What else do you want to know about your spousal IRA contribution limits and filing? Let us know in the comments section below.
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Editor’s Note: This article was originally published on March 21, 2018, and has been updated for quality and relevancy.