Till Death Do Us Part.  When a couple join in holy matrimony, there are many new discoveries awaiting them.  When it comes to their finances, there are potential to be some added benefits: joint checking accounts for consolidated record keeping, joint tax filing status, and lastly; the ability to contribute for a non-working spouse to contribute to their IRA.  Ahhhh….isn’t marriage bliss? There are special rules and restrictions that apply to spousal contributions to IRAs that should also be considered when selecting an IRA for your family.  Here we look at some of those rules to help you make an informed decision regarding your IRA account.

Disclaimer: While as tempting as it sounds, I would not suggest that a young couple elope just to be able to have access to a spousal IRA

Rules for spousal contributions.

There are a few basic rules to consider if you will be making contributions to your spouse’s IRA.  For the year that you are making contributions, you must meet the following criteria:

• Married to your spouse at the end of the tax year.
• Spouse earned taxable income for the tax year.
• File a joint federal income tax return.
• Your taxable income must be less than that of the owner of the IRA.

It is also important to remember that the contribution limits are subject to change therefore it is important to remain up to date with IRS tax limits regarding maximum contributions that both you and your spouse can make to an IRA each year.

Spousal IRA Contributions

photo credit: er1danus

In order to contribute to an IRA you must have taxable income.  This includes wages, commissions, bonuses and self employment income.  This would generally rule out contributions made to an IRA from a non-working spouse, however that is not the case.  Spousal contributions can be made to an established IRA from a spouse using the compensation income of the working spouse.  This can be beneficial for stay-at-home parents or non working spouses who wish to contribute to retirement savings.  In 2010 the contribution limits for the non-working spouse under the age of 50 was $5,000 for the tax year.  This is in addition to the $5,000 their working spouse could contribute, equaling a total of $10,000 in possible savings.  If you are 50 years of age or older, you can contribute an additional $1,000 per year in “catch up” contributions.

Taxation of Spousal IRA Contributions

Spousal contributions are taxed just as owner contributions.  This will depend on the type of IRA account to which you are contributing.  With a traditional IRA, all or most of your contributions can be considered a tax-deduction if you meet certain income requirements.  While this is a great tax benefit at the time of contribution, it is important to remember that distributions from the traditional IRA will be subject to taxation.  Contributions made to a Roth IRA are not considered tax deductible and will be subject to income taxes when you file your federal income tax return.  While the tax benefits are not immediately realized, you will not have to pay further taxes when you take qualified distributions.

As you can see there are several factors to consider before deciding which type of IRA is right for you and your family.  Once the decision is made, rest assured that you and your spouse are taking the necessary action to ensure a financially secure retirement.  And if you haven’t told your significant other that you love them in a while, here’s your chance

This information is not intended to be a substitute for specific individualized tax, legal or investment planning advice.  We suggest that you discuss your specific tax issues with a qualified tax advisor.

photo credit: Derek K. Miller

photo credit: elora.daphne

IRA’s (Individual Retirement Accounts) are a vital tool in retirement planning.   Younger investors may prefer the Roth IRA, while baby boomers may choose the traditional IRA.   When you retire, you may want to convert all your retirement assets into a rollover IRA.   So many choices and even more options can leave somebody overwhelmed on what the right IRA to choose when planning for retirement.   If you have an IRA, be sure to avoid these 12 mistakes:

1. Not taking advantage of the stretch distribution option or not establishing it properly.

The “stretch IRA” is a way for each IRA beneficiary to maximize payouts over his or her entire life expectancy. Properly designating beneficiaries and informing them of the IRA owner’s “stretch” intentions are key to making this strategy work.

2. Not naming or updating IRA beneficiaries.

Not listing primary and contingent beneficiaries may result in the distribution of the IRA assets to the IRA owner’s estate, resulting in accelerated distribution and taxation. Not keeping beneficiary designations current and coordinating them with other estate planning documents can also lead to conflicts and unintended results.

3. Making inappropriate spousal rollovers.

Most IRAs list the owner’s spouse as the primary beneficiary. One of the most popular strategies for a spousal beneficiary is simply to roll the inherited IRA into his or her own IRA. But in some cases it can be more tax efficient for a surviving spouse to keep the IRA as an inherited beneficiary IRA or disclaim the assets, thereby allowing them to pass to the contingent beneficiary.

4. Not taking advantage of “IRD” if you are a beneficiary.

Upon the death of the IRA owner, his or her IRA is included in the estate, creating an estate tax liability (if applicable) as well as an income tax liability for beneficiaries. Many IRA beneficiaries do not realize that IRAs are considered “Income in Respect of a Decedent” (IRD), according to Section 691(c) of the IRS Code. The IRD designation allows beneficiaries to take a federal income tax deduction for any estate taxes paid on the IRA’s assets, thus limiting double taxation of the IRA assets.

5. Rolling low-cost-basis company stock into an IRA.

Distributions from a qualified plan such as a 401(k) are generally taxed as ordinary income; federal income tax rates range from 10% to 35% (as of 2009). If company stock is rolled into an IRA, future distributions are taxed as ordinary income. If, instead, the company stock is taken as a lump-sum distribution from the qualified plan, only the cost basis of the stock is taxed as ordinary income. This is called Net Unrealized Appreciation. (Note: The distribution must be taken as stock, not cash.) Unrealized capital appreciation (the difference between the cost basis and current fair market value) is not taxed until the stock is sold, upon which it would be taxed as long-term capital gains, which are taxed at a lower rate than ordinary income (at 2009 tax rates). Be sure to talk with your tax advisor.

6. Not taking advantage of a Roth IRA.

A Roth IRA is a potentially valuable retirement resource. Not only are qualified withdrawals tax free, but Roth IRA distributions do not impact the taxability of Social Security, and Roth accounts pass to beneficiaries tax free as long as the account passes the five year rule for qualified distributions. There are income limits that affect eligibility for a Roth IRA, so be sure to talk this option over with your financial advisor.

7. Not taking advantage of increased contribution limits.

The contribution limits for 2009 are $5,000.  IRA owners age 50 or older can make an additional $1,000 “catch-up” contribution in 2009. Roth IRA limits and traditional IRA limits are the same.

8. Assuming that a nonworking spouse cannot contribute.

The truth is that separate “spousal” IRAs may be established for spouses with little or no income up to the same limits as the working spouse.

9. Missing important dates.

Estate taxes, if applicable, are due nine months after the IRA owner’s death. The same deadline applies to beneficiaries who wish to disclaim IRA assets. By September 30 of the year following the year of the owner’s death, the beneficiary whose life expectancy will control the payout period must be identified. Generally, IRA beneficiaries who want to receive distributions over a life expectancy must begin taking required distributions by December 31 of that same year.

10. Taking the wrong required minimum distribution (RMD).

IRA owners in their seventies are required to take the RMD out of their accounts each year, based on the value of all their non-Roth IRAs. Those who do not take enough out each year may be subject to a federal income tax penalty of 50% of the amount that should have been taken as an RMD but was not. Consolidating retirement assets may make it easier to manage these distributions. Current law allows a one-time suspension of the requirement to take an RMD for 2009. RMDs must resume in 2010.

11. Placing the title of an IRA in trust.

Making a trust the actual owner of an IRA causes immediate taxation — including the 10% penalty tax if the IRA holder is under age 591⁄2.

12. Paying unnecessary penalties on early (pre-age 591⁄2) IRA distributions.

As long as withdrawals are made in accordance with the requirements of IRS Code Section 72(t), there is no need to pay penalties on distributions from IRAs before the owner is age 591⁄2. Section 72(t) allows for three calculation methods to determine substantially equal periodic payments based on the owner’s life expectancy. Payments must continue for 5 years or until age 591⁄2, whichever is the longer period of time.

photo by Charles NJC

*Restrictions, penalties and taxes may apply.  Unless certain criteria are met, Roth IRA owners must be 59 1/2 or older and have held the IRA for 5 years before tax-free withdrawals are permitted.