The Internal Revenue Service is very strict with its definition of IRAs as individual retirement savings plans. You and your wife can create spousal IRAs and contribute to them as long as you meet IRS income requirements. However, you cannot actually combine your IRA with your wife’s while both of you are living.
IRS spousal IRA rules allow a husband and wife to make contributions to each other’s IRAs. The maximum annual contribution for each IRA is $5,000 and increases to $6,000 when the account owner reaches age 50. This means a couple can contribute a maximum of $10,000 to $12,000 each year. To take advantage of the spousal IRA rules, a couple must file a joint tax return. The amount you contribute to your IRA may not exceed your combined taxable compensation, minus any contributions your wife makes to your traditional IRA and minus contributions you made to your wife’s Roth IRA. Your wife’s contributions are subject to the same rule.
If a married couple’s income exceeds IRS limits on IRAs, the tax deduction for traditional IRA contributions is gradually phased out when either is covered by a retirement plan at work. However, you may still make non-deductible contributions to a traditional IRA. As of 2012, if your wife was covered and you were not, your deduction started to decrease when your adjusted gross income reached $173,000 and was eliminated when AGI reached $183,000. If you were covered by a retirement plan where you worked, the phase-out range was $92,000 to $112,000. For Roth IRAs, phase-out rules eliminate the amount you can contribute, regardless of any employer-provided retirement plans. The Roth phase-out range for spouses filing a joint return in 2012 was $173,000 to $183,000.
When a spouse passes away and has named her husband as the beneficiary of her IRA, the surviving spouse has several options. He may combine his wife’s IRA with his own by rolling the inherited IRA into his own IRA. The funds maintain their tax-deferred status. Alternatively, he may choose to remain a beneficiary. This can allow a surviving spouse to take penalty-free distributions from the inherited IRA even if he has not reached age 59 1/2. A surviving spouse may elect to disclaim or give away the inherited IRA. For instance, you could give your wife’s IRA to your children. Finally, you can cash in the IRA. Consult a financial adviser first because cashing in can have expensive tax consequences.
Inherited Roth Rules
The rules governing inherited Roth IRAs are the same as for traditional IRAs. However, Roth IRA distributions may not be qualified. If the distributions are not qualified, you’ll have to pay ordinary income taxes on them. This does not change your ability to combine your wife’s IRA with your own if she passes away. However, distributions from an inherited Roth IRA will be qualified only when the account has been open at least five years. If you combine accounts with a rollover, the money must stay in your Roth IRA for at least five years, and you must be at least 59 1/2 years old before any distributions you take are tax free.
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