Have You Faced This Dilemma with Spousal Contributions? This Week’s Q&A | Ed Slott and Company, LLC

Have You Faced This Dilemma with Spousal Contributions? This Week’s Q&A

By Jeffrey Levine, Chief Retirement Strategist  
Follow Jeff on Twitter: @IRAGuru4EdSlott

This week's Slott Report Mailbag looks into IRA beneficiaries, Roth IRAs, and spousal contributions. As always, we recommend you work with a competent, educated financial advisor to keep your retirement nest egg safe and secure. You can find one in your area here.

Question:

Hello,

My brother left an IRA and listed me as the only beneficiary, however, he wanted it divided among his 4 siblings. How do I do this and pay the taxes?

Thank you, Joshlyn

Answer:

Joshlyn,

This is a very unfortunate scenario, but one we see quite often. There are two possibilities here. The first possibility is that if your siblings could become beneficiaries of the IRA via a default custodian agreement, you could execute a partial disclaimer of the IRA to have them inherit the funds directly. If this were possible, it could be the preferred option because they would be able to be treated as the direct beneficiaries of the account. With timely action, each of your siblings would be able to use their own life expectancy to calculate their RMDs. In addition, each account would be coded to your respective sibling’s Social Security number, making the tax issue much simpler. Again, whether this is even an option will depend on the custodial agreement’s default beneficiary provisions. Even if this can work, it might not be worth it depending on the account’s size. A disclaimer is a legal process, and therefore, it’s generally advisable to consult with an attorney.

In the alternate, you’re left with the less-than-perfect option of taking money out of the account, estimating the amount of taxes you’ll owe on the distribution, and then gifting amounts to your siblings. If the amounts are large enough, you may need to file a gift tax return.

Question:

My client asked, “I am retired and have a part time job where I make $3,000 per year that I claim on my tax return. How much can I put in a Roth IRA?” I told him the entire $3,000. Then he asked could his wife, who has no income, make a spousal contribution to a Roth of the same amount. I have studied all the reference books I own, read the applicable IRS publications and cannot come up with a definitive answer for this caller. Could you please help? I have been a financial advisor and CFP for 34 years and have never had to answer this question. I would appreciate some clarification on this one.

John

Answer:

John,

If your client has $3,000 of compensation – in this case, earned income – then that would be the most that would be eligible to contribute in total to his Roth IRA and to that of his spouse. So if he puts the entire $3,000 into his Roth IRA, no amount can be contributed to the Roth IRA of his spouse.

 

 

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