Spousal IRA Rules: Cutting Through the Thicket

by Randall Luebke RMA, RFC on October 4, 2011

By Elaine Floyd, CFP

The rules governing spousal IRAs can be bewildering, since contributions and deductibility are affected both
by each individual’s income and their tax status as a couple. Here’s a breakdown of the rules that cuts through the confusion.

For tax purposes, a married couple filing a joint return is considered a
single economic unit. Both spouses’ incomes are reported on the same form, and
both are responsible for reporting and paying taxes on it. However, some of the
rules pertaining to IRAs and retirement plans are still based on each spouse’s
individual earnings. But the actions each spouse takes individually may affect
their joint tax liability, creating a kind of crossover confusion between what
they can do as individuals and what they can do as a couple. Let’s see if we can
clear things up.

Spousal IRAs

First let’s review the contribution rules for spousal IRAs, setting aside
deductibility for the moment. These are pretty simple, actually. If a married
couple files a joint tax return, each spouse may contribute up to $5,000 to an
IRA for 2011 ($6,000 if over 50) as long as together they have earned income of
at least $10,000 (or $12,000 if over 50). The deadline for the contribution is
the due date for filing their tax return, not including extensions.

A spousal IRA is just like any other IRA except that the person who owns it
is relying on his or her spouse’s income to meet the earned income requirement.
It doesn’t matter who actually makes the contribution or where the money comes
from.

If John is the sole wage earner and Jane has money from an inheritance, she
can use her own money to fund the IRA even though she is relying on John’s
earned income for eligibility. If Jane has no money of her own and John makes
the contribution to Jane’s IRA out of his earnings, that money becomes hers. She
can name John as beneficiary if she wants, but she is not required to do so.
(Note that these definitions of “his” and “hers” do not necessarily imply that
they would be considered separate property in a divorce proceeding. Retirement
plans and IRAs funded by wages earned during the marriage are usually subject to
division based on community property or equitable distribution laws, not whose
name is on the account.)

Aside from the special rule granting nonworking spouses the right to fund an
IRA based on the working spouse’s earned income, spousal IRAs are subject to the
same rules as regular IRAs. In the case of traditional IRAs, the maximum age of
the IRA holder is 70-1/2; the age of the working spouse doesn’t matter. In the
case of Roth IRAs, the couple’s joint income ( modified adjusted gross income,
or MAGI) must be under $169,000 in 2011 for the full contribution or $179,000
for a partial contribution.

Deductibility of contributions to traditional IRAs

Now let’s look at the rules for deducting contributions to traditional
spousal IRAs. This gets pretty complicated if the working spouse is an active
participant in a qualified retirement plan, because the income levels that
determine IRA deductibility are different for the nonworking and working
spouses.

Let’s say Jane is the nonworking spouse and therefore not an active
participant in a qualified plan. John is the working spouse covered by a
retirement plan at work. They contribute $5,000 to Jane’s spousal IRA and $5,000
to John’s regular IRA. On their joint tax return they may deduct both
contributions only if their joint income (MAGI) does not exceed $90,000 in 2011.
They may take a partial deduction of both contributions if MAGI is between
$90,000 and $110,000 in 2011.

Now here is where it gets confusing.

If MAGI is over $110,000 in 2011 but less than $169,000, they may deduct
Jane’s contribution but not John’s. That’s just the rule: if joint income
exceeds $110,000, the contribution for the working/participant spouse is not
deductible. However, as long as MAGI is less than $169,000, the contribution for
the nonworking/nonparticipant spouse is fully deductible. (A partial deduction
may be taken if joint income is between $169,000 and $179,000). If MAGI is over
$179,000 in 2011, neither contribution is deductible.
If both John and Jane are active participants in a qualified retirement plan
(not likely if Jane has no earned income but possible if she has a job but earns
less than the amount of the contribution and thus relies on John’s income to
meet the earned income requirement), neither contribution is deductible if MAGI
is more than $110,000. If MAGI is between $90,000 and $110,000, a partial
deduction is allowed. If it’s under $90,000, both contributions are fully
deductible.
If neither John nor Jane is an active participant in a qualified plan, both
IRA contributions are fully deductible regardless of their income.

When both spouses work

If each spouse has earned income of at least $5,000 (or $6,000 if over
50)—and if they are under 70-1/2—they may make the full IRA contribution to a
traditional IRA based on their own earnings. The rules for deductibility are the
same as those noted above and assume the spouses are married and file a joint
return. Here they are in a nutshell:

If neither spouse is an active participant in a qualified retirement plan,
then both IRA contributions are deductible regardless of income.
If both spouses are active participants in a qualified retirement plan, then:
- both contributions are deductible if MAGI is less than $90,000 in 2011.
- neither contribution is deductible if MAGI is more than $110,000 in 2011.
- both contributions are partially deductible if MAGI is between $90,000 and
  $110,000 in 2011.
If one spouse is an active participant in a qualified retirement plan,
then:
- the nonparticipant’s contribution is fully deductible if MAGI is less than
  $169,000 in 2011.
- the nonparticipant’s contribution is not deductible if MAGI is over $179,000
  in 2011.
- the nonparticipant’s contribution is partially deductible if MAGI is between
  $169,000 and $179,000 for 2011.
- the participant’s IRA contribution is fully deductible if MAGI is less than
  $90,000 in 2011.
- the participant’s IRA contribution is not deductible if MAGI is more than
  $110,000 in 2011.
- the participant’s IRA contribution is partially deductible if MAGI is between
  $90,000 and $110,000 in 2011.

Remember that regardless of whose contribution qualifies for the deduction,
it affects both spouses’ taxes because it is reported on their joint tax return.

Married filing separately

If a married couple files separate returns, the rules are entirely different.
First, they may not do a spousal IRA at all. If the spouses lived together
during any part of the year, and if one spouse is an active participant in a
retirement plan, the other spouse is also considered an active participant. No
deduction for either contribution is allowed if MAGI is over $10,000. If neither
spouse is an active participant, then both contributions are deductible
regardless of income.

If the spouses did not live together during the year, the rules for single
individuals apply:

If the individual is not an active participant in a retirement plan, the
contribution is fully deductible regardless of income.

If the individual is an active participant in a retirement plan, the
contribution is:
- fully deductible if MAGI is less than $56,000 in 2011.
- not deductible if MAGI is more than $66,000 in 2011.
- partially deductible if MAGI is between $56,000 and $66,000 in
  2011.

Roth IRAs

If MAGI on a joint return is less than $169,000 in 2011, both spouses may
contribute up to $5,000 ($6,000 if over 50) to a Roth IRA. Again, the spousal
rules come into play allowing a nonworking spouse to count the other spouse’s
income in meeting the earned income requirement. Deductibility is not an issue
with Roth IRAs, nor is there a maximum age. (Note that a partial contribution
may be made by both spouses if MAGI is between $169,000 and $179,000 in 2011.

No contribution may be made to a Roth IRA by a married person who files a
separate return and who lived with his or her spouse during any part of the
year.

Planning for couples with nonworking spouses

The spousal IRA was designed to enable nonworking spouses to accumulate
savings for retirement. Although the annual contribution amount may seem small
compared to the amount that will be needed to support someone in retirement,
every little bit helps. In fact, because nonworking spouses are not contributing
to a qualified retirement plan or to the Social Security system, their IRA could
end up being a significant source of retirement income, especially if divorce or
death removes the support of the working spouse. Encourage your clients to take
advantage of the spousal IRA rules and work with you and their tax advisors to
help them choose the best type of IRA (traditional or Roth) for their
circumstances.