Can I Make a Spousal IRA Contribution For My Wife?

By Jeffrey Levine and Beverly DeVeny
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This edition of the Slott Report Mailbag (one of two consumer mailbags this week!) examines how to name contingent beneficiaries, looks at the misconceptions of “taxable income” and answers a reader’s question about contributing to a Roth IRA on his wife’s behalf. As always, we stress the importance of working with a competent, educated financial advisor to keep your retirement nest egg safe and secure. Find one in your area at this link.
 

1.

My wife and I named each other as primary beneficiaries of our respective IRAs and our two children as secondary beneficiaries, each receiving 50% of the inherited amount. A Financial Advisor suggested that we delete the joint beneficiary clause and create two IRA accounts with each child named solely as the secondary beneficiary. His argument was that the required minimum distribution (RMD) paid out of the jointly inherited IRA will be based on the older sibling’s age even though each child will get a separate 50% of the inherited amount.

A second Financial Advisor disagreed and said that since each child will create a separate and unique inherited account with their respective 50%, their RMD will be determined by their own age and not by the older sibling’s age. He maintains that creating two IRA accounts is an unnecessary complexity and can be easily bypassed by the children creating two distinct inherited IRAs.

Can you please clear up this conflicting interpretation of the inherited RMD rule? If I go along with the first advisor’s interpretation then my wife and I will each have to create two IRA accounts and nominate one child to each IRA. This will add more complexity and paperwork, which I would like to avoid, if possible, provided it does not put the younger child at a disadvantage.

Thanks for your help!

Narinder

Answer:
The good news here is that neither advisor’s advice would hurt you. The answer to your question though, is that creating separate accounts now for your contingent beneficiaries is largely unnecessary. You mentioned that you and your wife have each named each other as your primary beneficiaries. That’s pretty typical, and after the first of you passes, the survivor is likely to complete a spousal rollover, moving the decedent’s IRA into their own (although this is not always the best move). At that time, the survivor’s beneficiary form should be updated, naming your two children as primary beneficiaries (if that’s still what’s desired).

If the above actions are taken, upon the death of the “survivor,” your children will inherit whatever is left of the IRA money. At that time, they can establish separate inherited IRA accounts, and as long as they do so by December 31 of the year after they inherit, they will each be able to use their own life expectancy to calculate RMDs.

2.

I found you through reading this MarketWatch article. I am hoping you can give me a response! I just got a Roth IRA!

I make $30,600 this year + $5,500 Roth IRA contribution. So that’s $36,100 – 15% tax bracket! However, next year with my raise, I will get $34,200 + $5,500 Roth IRA. That’s $39,700 so then I am in the 25% tax bracket right!? I pay no federal taxes all year, so I get nearly my whole gross pay, but 10% tax on $39,700 is $3,900!

Is there even any reason to work December next year? I tell my employer I have to take the month off to avoid 25% tax bracket, take a nice vacation, and stay in the 15% tax bracket and save myself almost $1,000.

Am I really reading this writer’s article correctly?

I’m new to investing, and would be so grateful for clarification as he referenced you as the source.

Answer:
Congratulations on beginning your savings! You should pick up a copy of our Fund Your Future book. It would help you understand the basics and some foundational savings principles that will help you in the long run.

I see three glaring misconceptions that need to be addressed. The first is that if you make a Roth IRA contribution, you don’t add the amount of the Roth IRA contribution to your income for the year, you simply don’t get a deduction. So if you made $30,600 and made a Roth IRA contribution, your income would still be $30,600.

Second, the amount of money you make and the amount of money you actually pay tax on are often two totally separate things. There’s no way for me to know for sure what your personal tax situation is, but you may be entitled to any number of exemptions and/or deductions that reduce the amount of income subject to tax. This is appropriately known as your taxable income.

Finally, when your taxable income exceeds the upper limit of one income tax bracket and goes into the next, only the portion of the income that exceeds the top of the previous bracket is taxed at the higher rate, not the full amount.  For example, let’s say that you were $300 over the upper limit of the 15% threshold. If that were the case, you’d have some income taxed at 10%, some income taxed at 15% and only $300 of income taxed at 25%.

3.

Hi Ed and Company,

I just read Sarah Brenner’s article How Stay-at-Home Spouse Can Make An IRA Contribution.  It appears a spousal IRA contribution can only be made if a parent has left the workforce to stay at home to care for children. Is that rue?  Question 2, in the FAQ section of your website, it states that you can contribute on behalf of a non-working spouse if you meet the criteria from question 1, which we do.

Last year, I earned just under $10,000 from a part-time job. My wife is retired collecting a pension, which is not eligible for an IRA contribution.  I contributed $6,500 to my wife’s Roth IRA and $3,000 to my Roth IRA.  We are both over 60.

Was my contribution to my wife’s Roth IRA allowed?

Thanks!

Pete

Answer:
A spousal IRA contribution doesn’t require that one spouse has left the workforce to be a stay-at-home spouse. A spousal IRA contribution is just a contribution that is made by a non-working or low income spouse, where they essentially “borrow” the earnings of a working spouse to make a valid contribution.

That said, it sounds like your Roth IRA contributions for last year were good. As long as you were below the Roth IRA contribution income limitations, you’re golden! You worked and made (roughly) $10,000, and your cumulative contributions to your Roth IRAs were below that amount. Good work!