There’s a lot of misinformation out there regarding spouse IRAs. I will attempt to explain as much of it as I can with a Q
Are you and your spouse looking for ways to maximize your retirement savings? If you’re a high earner, you may be wondering if your wife can contribute to a backdoor Roth IRA. The answer is yes, she can! In fact, there are several advantages to having both spouses contribute to backdoor Roth IRAs.
What is a Backdoor Roth IRA?
A backdoor Roth IRA is a strategy that allows high-income earners to contribute to a Roth IRA, even if they are above the income limits. This is done by making a non-deductible contribution to a traditional IRA and then converting that contribution to a Roth IRA.
Can My Wife Contribute to a Backdoor Roth IRA?
Yes, your wife can contribute to a backdoor Roth IRA, even if she has no earned income. The only requirement is that you have at least $14,000 of earned income between the two of you (or $15,000 or $16,000 if one or both of you is at least 50 years old).
Benefits of Backdoor Roth IRAs for Couples
There are several benefits to having both spouses contribute to backdoor Roth IRAs:
- Tax-free growth: The money in a Roth IRA grows tax-free, so you’ll have more money to retire on.
- Tax-free withdrawals: When you retire, you can withdraw the money from your Roth IRA tax-free and penalty-free.
- No RMDs: Unlike traditional IRAs, you don’t have to take required minimum distributions (RMDs) from your Roth IRA after you turn 72.
- Estate planning: Roth IRAs can be a valuable estate planning tool. When you die, your beneficiaries can withdraw the money from your Roth IRA tax-free.
How to Set Up a Backdoor Roth IRA for Your Wife
If you’re interested in setting up a backdoor Roth IRA for your wife, here are the steps you need to take:
- Open a traditional IRA for your wife. You can do this at any brokerage firm that offers IRAs.
- Make a non-deductible contribution to the IRA. The maximum contribution for 2023 is $6,500, or $7,000 if your wife is 50 or older.
- Convert the non-deductible contribution to a Roth IRA. You can do this by contacting the IRA custodian and requesting a conversion.
Considerations for Backdoor Roth IRAs
There are a few things to keep in mind before you set up a backdoor Roth IRA for your wife:
- Taxes: The converted amount may be taxable, depending on your income and the amount of deductible contributions you have in your traditional IRAs.
- 5-year rule: You must wait at least 5 years after converting the money to a Roth IRA before you can withdraw it tax-free and penalty-free.
- Income limits: If your modified adjusted gross income (MAGI) is above $153,000 ($228,000 for married filing jointly), you won’t be able to contribute to a Roth IRA, even through the backdoor method.
If you’re a high-income earner, a backdoor Roth IRA can be a great way to save for retirement. And if you’re married, your wife can also contribute to a backdoor Roth IRA, even if she has no earned income. Just be sure to consider the taxes, 5-year rule, and income limits before you get started.
Additional Resources
- Fidelity Viewpoints: Backdoor Roth IRA: Is it right for you?
- InvestmentNews: 4 warnings about using backdoor Roth IRAs
- IRS Publication 590: Individual Retirement Arrangements (IRAs)
FAQs
Q: Can my wife contribute to a Roth IRA if she doesn’t have earned income?
A: Yes, your wife can contribute to a Roth IRA if she doesn’t have earned income, as long as you have at least $14,000 of earned income between the two of you (or $15,000 or $16,000 if one or both of you is at least 50 years old).
Q: How much can my wife contribute to a backdoor Roth IRA?
A: The maximum contribution for 2023 is $6,500, or $7,000 if your wife is 50 or older.
Q: Are there any taxes on backdoor Roth IRA conversions?
A: Yes, the converted amount may be taxable, depending on your income and the amount of deductible contributions you have in your traditional IRAs.
Q: How long do I have to wait before I can withdraw money from a backdoor Roth IRA?
A: You must wait at least 5 years after converting the money to a Roth IRA before you can withdraw it tax-free and penalty-free.
Q: What are the income limits for backdoor Roth IRAs?
A: If your MAGI is above $153,000 ($228,000 for married filing jointly), you won’t be able to contribute to a Roth IRA, even through the backdoor method.
What Are the Spousal IRA Contribution Limits?
The answer to this question depends on three things:
- The total income earned by the couple (also known as the modified adjusted gross income, or MAGI)
- The age of the spouse
- How the couple files their taxes
If the spouse is under 50, the maximum spousal IRA contribution is $6,000 (2021) or the total earned income (commissions, tips, salaries, wages, nontaxable combat pay, and self-employment income) less the non-spousal IRA (and/or Roth IRA) contribution for the couple. If a couple is 50 years old, the maximum is $7,000, which is equal to their combined earned income less their non-spousal IRA contribution. Roth IRA contributions are phased out over a MAGI range of $198,000–$208,000 (2021, MFJ), in contrast to traditional IRA contributions, which have no cap for high earners. No spousal IRA contribution may be made if the couple files their taxes as Married Filing Separately (MFS) as opposed to Married Filing Jointly (MFJ).
Do We Just Combine Our IRAs?
No. IRA stands for INDIVIDUAL Retirement Arrangement. They are always individually owned. They are never co-owned. Your spouse may receive benefits from your IRA, but they are not permitted to co-own it (unless you die) Instead of contributing $12,000 to each IRA, you contribute $6,000 (2021, under 50) to each IRA.