Will my wife be allowed to take the full deduction on her Traditional IRA contributions?
I currently work full time and my wife is unemployed. We file our taxes jointly and our MAGI for 2016 was $140,000. I contributed the max to my company's 401(k) plan last year and plan to do the same for 2017. We would like to open a spousal Traditional IRA in my wife's name. If our MAGI stays the same for 2017, will she be able to take the full deduction on her Traditional IRA contributions?
Yes, she will be able to take the full deduction on her traditional IRA contribution. An unemployed wife can contribute to an IRA by borrowing her husband’s income (this is not the type of borrowing she has to pay back). The husband needs to share the income by filing a joint tax return with the wife.
A nonworking wife can use the taxable compensation of her husband to make an IRA contribution up to the maximum of $5,500 per year (or $6,500 if she is 50 or older) for 2017. Her IRA contribution cannot exceed the husband’s taxable compensation less his IRA contributions. As long as he earns enough taxable compensation, both of them can contribute the maximum to their IRAs. The husband is not required to make an IRA contribution for the wife to make one using his taxable compensation.
The eligibility requirements for the spousal IRA are straightforward:
- Marital Status: Married
- Tax Filing Status: Married, filing jointly
- Earnings: Contributing spouse must have compensation/earned income that amounts to at least the amount annually contributed to the non-working spouse’s IRA. If the contributing spouse also has an IRA, annual compensation/earned income must exceed the combined contributions the IRAs.
- Age: The non-working spouse must be under 70 1/2 in the year of the contribution for a traditional IRA. There are no age restrictions on a Roth IRA for a non-working spouse.
Understand that IRAs must be held separately (not jointly). This means that the non-working spouse owns the assets in the IRA. Once your working spouse contributes to the IRA, the money becomes hers. The IRA is in her name and opened with her social security number, and it remains hers even if you divorce.
It appears you have an answer for the above question. However, based on your MAGI alone, it may be more beneficial to open a Roth IRA for both you and your wife. While I do not have your complete financial picture, this is an avenue you may want to explore. A Roth IRA money can provide you with some great flexibility in your retirement plan. Feel free to reach out to me if you would like to talk more in depth on the topic.
Good for you to contribute the max to your company's 401(k) which ideally includes a company match (you didn't say in your question).
However, you shouldn't be contributing to a traditional IRA. With a combined income of 140 thousand dollars, such a contribution is legal, but is not tax-deductible, making it almost worthless. Instead, you and your wife should each be contributing the maximum to a Roth IRA each year. If either of you is over 50 years of age, the annual maximum Roth limit is $6,500; otherwise, the maximum is $5,500 per person. You and your wife can each contribute this amount to a Roth even if you are the only wage earner.
Interestingly, even if your total income were lower, it would still be preferable for both of you to contribute to a Roth because the total after-tax balance over a period of decades will almost always be higher with a Roth than with a traditional IRA even when the traditional IRA is deductible. You can prove this with a scientific calculator or a spreadsheet. The only exception is when you contribute to a traditional IRA and your account loses value, where you end up coming out ahead since you got the full amount of the original deduction and you can then convert the depressed shares in your traditional IRA to a Roth IRA before they rebound.
It sounds like you should be fine. If you file a joint return, your wife does not need earned income to contribute and the MAGI limit is actually $186K if you have access to a 401(k) at work and she does not. Here is the IRS page:
It is amazing how badly traditional sites, like Fidelity, cover this limit. This limit is usually the same as the Roth contribution limit, the one area the IRS is usually consistent.
Nice Job Investing!
Mark Struthers CFA, CFP®
It appears that based on the information you provided, that she would be eligible. However, I highly recommend that you either consult your tax preparer or your tax preparation software. Additionally, IRS publications provide a lot of guidance on these types of tax questions. My advice is to refer to IRS publication 590-A. Take a look at page 2 of that publication and you will see the rules related to a spouse who is not participating in a retirement plan. One important caveat is that she must not be covered by a retirement plan for any period of time during the year. Participation for one day can disqualify her. Also, even if you do not contribute, but could have contributed, she may be disqualified.