Learn the advantages of making 2023 IRA contributions before the April deadline.
Spousal IRA contributions can also be made to a Roth IRA. The advantage of the Roth IRA is that while the contribution to a Roth IRA is made with after-taxed dollars, the Roth IRA accrues earnings within the IRA. Provided certain requirements are met, withdrawals from a Roth IRA are completely tax-free. The Roth IRA contributions can actually be withdrawn tax-free at any time.
Spousal contributions to traditional IRAs may be deductible as an “adjustment to income,” reducing adjusted gross income (AGI) and therefore reduce taxable income. Reduced taxable income results in reduced federal and state tax savings. Reduced AGI can result in other tax savings via tax deductions and tax credits. Many federal tax credits and tax deductions are lost if an individual’s AGI is too large. For example, the federal educational tax credits (the American Opportunity Credit and the Lifetime Learning Credit) the Student Loan Interest Loan Deduction) will not be available if an individual’s or married couple’s AGI is too large.
For some married couples, a tax-deductible spousal contribution to a traditional IRA thereby lowering AGI to the extent that any qualified dividends and long-term capital gains received during the year qualify for a 0 percent “preferential” federal income tax rate. A married couple in which at least one spouse is enrolled in Medicare Part B (Medical Insurance) could end up in a lower Medicare Part B “income-tier” when a tax-deductible traditional IRA contribution is made, thereby lowering AGI.
The downside to making deductible traditional IRA contributions is that the rules for making these contributions are confusing. The following are the IRS rules with respect to making deductible traditional IRA contributions for tax year 2023.The following example illustrates:
Example 1. Stan and Dina are married, and both are age 63. Stan is a federal employee and earned $110,000 during 2023. Dina is retired and earns $5,000 from consulting. The couple can contribute $7,500 to a traditional IRA for Stan and $7,500 to a traditional IRA for Dina.Traditional IRA owners need to be aware of AGI limitations for making deductible traditional IRA contributions. In particular, there are modified adjusted gross income (MAGI) limits that are imposed each year by the IRS in order for single individuals and married couples to make deductible traditional IRA contributions.
With respect to married couples, the first question that needs to be asked when determining whether each spouse’s traditional IRA contribution is deductible is whether either spouse actively participates in a workplace retirement plan. An example of a workplace retirement plan is a 401(k) or 403(b) retirement plan, the Thrift Savings Plan, or a defined benefit plan such as the CSRS or FERS retirement plans.
If neither spouse actively participates in a workplace retirement plan, then there are no MAGI limits for deducting each spouse’s contribution to a traditional IRA. The deductibility of a spousal traditional IRA contribution ends at $228,000 of MAGI for 2023 for a spouse who does not participate in a workplan retirement plan and is married to someone who does participate in a workplace retirement plan. If both spouses actively participate in a retirement plan, then both spouses are subject to the “phase-out” of deductible traditional IRA contributions, ending at $136,000 of MAGI during 2023. The following two examples illustrate the deductibility and nondeductability of traditional IRA contributions for 2023:
Example 2. Herbert and Cecelia are a married couple. Herbert is age 66 and retired from federal service. Cecelia is aged 64 and works part-time as an office clerk. Her employer does not offer any retirement plan for employees to participate in. During 2023, Cecelia’s gross salary was $55,000. Both Cecelia and Herbert are eligible to contribute to an IRA for 2023, a maximum contribution for each of $7,500. This is because Cecelia has earned income allowing Herbert to contribute to an IRA. Their MAGI for 2023 is $175,000. Herbert and Cecelia are each eligible to contribute $7,500 to a deductible traditional IRA because neither Herbert nor Cecelia is an active participant in a retirement plan.
Note that even though Herbet is receiving a FERS annuity and making TSP withdrawals, he is retired and therefore not an “active participant” in a retirement plan. In particular, he cannot contribute to either retirement plan.
Example 3. Joyce and Stuart are married, and both are federal employees. Joyce is 38 and Stuart is 40. During 2023, their MAGI was $188,500. Both Joyce and Stuart are actively participating in a retirement plan. They are FERS-covered employees, and each contributes to the TSP. Since their MAGI exceeds $136,000, neither Joyce nor Stuart is eligible to contribute to a deductible traditional IRA for the year 2023.
Note that Joyce and Stuart are eligible to contribute to a “nondeductible” traditional IRA up to the annual contribution limit. There are no MAGI limits for contributing to a “nondeductible” traditional IRA. Many financial advisors discourage making contributions to nondeductible traditional IRAs because of record-keeping burdens.
Edward A. Zurndorfer is a CERTIFIED FINANCIAL PLANNER™ professional, Chartered Life Underwriter, Chartered Financial Consultant, Chartered Federal Employee Benefits Consultant, Certified Employees Benefits Specialist and IRS Enrolled Agent in Silver Spring, MD. Tax planning, Federal employee benefits, retirement and insurance consulting services offered through EZ Accounting and Financial Services, and EZ Federal Benefits Seminars, located at 833 Bromley Street – Suite A, Silver Spring, MD 20902-3019 and telephone number 301-681-1652. Raymond James is not affiliated with and does not endorse the opinions or services of Edward A. Zurndorfer or EZ Accounting and Financial Services. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors of RJFS, we are not qualified to render advice on tax or legal matters. You should discuss tax or legal matters with the appropriate professional.
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