Written by Sarah Brenner
Wedding season is upon us. Marriage changes many things, including saving for retirement. If a couple ties the knot, the wedding will have important consequences for the new couple’s IRAs. Here are five IRA rules every bride and groom should know.
1. Spousal contributions become available
When someone marries, they gain a new way of financing IRA contributions. Generally, to make an IRA contribution, the individual must receive compensation (usually W-2 income or net earnings from self-employment). A client who is single and does not have compensation is lucky. However, there is a special rule that applies to married couples. A married person can use a spouse’s compensation to fund an IRA contribution. If the spouses have sufficient compensation, each spouse can fund their entire IRA for the year. For 2022, that could mean $14,000 in combined savings if the couple turns 50 or older this year. This can be a huge benefit if one spouse is outside the workforce and is caring for children or elderly parents.
2. Roth IRA contributions and traditional IRA deductions may be affected
Marriage means not being able to file taxes as a single payer. Customers must choose between jointly married registration or married filing separately. This has an immediate impact on their ability to make Roth IRA contributions for this year. Contribution limits now depend on the spouses subscriber Revenues.
This means that some newlyweds may no longer be eligible to make Roth IRA contributions. Their income may be too high. It also means that any contributions they may have already made for the year could become redundant contributions. Consultants can help by fixing any excess Roth IRA contributions in a timely manner and by exploring back-to-back Roth IRA transfers for newly married clients who do not want to lose their ability to fund a Roth IRA.
This strategy, which was threatened by legislation proposed in Congress last year, has survived and is still available. Customers whose income is too high to contribute directly to a Roth IRA can make non-deductible traditional IRA contributions and then, subject to prorated rules, can convert these contributions to a Roth IRA.
On the traditional IRA side, marriage may mean that a person may not be able to deduct contributions. If the client is not covered by the company plan, the marriage could have a negative tax impact. One person who is not an active participant in a company plan can always deduct a traditional IRA contribution, regardless of income. A married person without a corporate plan is not very lucky. If the other spouse is an active participant, the ability of the non-participating spouse to deduct the traditional IRA contribution gradually diminishes at certain income levels. Customers may want to reconsider any traditional IRA contributions that were already made in 2022. There is still time to remove them as unwanted contributions if they are no longer deductible.
A good alternative would be to claim the contribution as non-deductible and then convert it using a backdoor Roth IRA conversion strategy.
3. Penalty-free distributions for spouse needs become available
Marriage has benefits when it comes to accessing IRA money without penalty. While the IRA is for retirement, distributions can be taken at any time. In most cases, if the IRA owner is under 59 years old, these distributions will be taxed and subject to the 10% early distribution penalty. However, there are exceptions to the 10% penalty. Some of these exceptions take into account the needs of the spouse.
Distributions that are free of fines are available to pay for deductible medical expenses. This is a qualifying medical expense in excess of 7.5% of adjusted gross income. Eligible medical expenses include spousal expenses. Clients can also receive a no-penalty distribution to pay for a spouse’s higher education expenses. These expenses include post-secondary education fees, fees, books, and required supplies and equipment. The student can be a full-time or part-time student.
4. Some IRA owners may be able to take smaller RMDs
Weddings are not just for young clients. Older clients may also be tying the knot. Seniors who marry may see Minimum Required Distributions (RMDs) affected. Typically, RMD is calculated using the IRS Standardized Age Table. However, for clients who are married to a spouse under 10 years of age and the single primary beneficiary of their IRA, there is a special rule. They calculated their RMD using the IRS’s joint life expectancy table instead. what is the benefits? RMD will be smaller. This can be an advantage for IRA owners who don’t need the money and want to reduce their taxable income.
5. Beneficiary forms must be updated
Marriage is a good time for clients to review their beneficiary designation forms. Do not lose sight of this important task. If the account holder wants the new spouse to be the beneficiary of the IRA, the IRA beneficiary forms must be changed and sent to the IRA trustee to reflect the change.
When it comes to inherited IRAs, spouse beneficiaries have options that are not available to non-spouse recipients. If your client is the recipient of his or her spouse’s IRA and the spouse died before the RMDs began, the surviving spouse may be able to delay RMDs from an inherited IRA by many years. Single spouse beneficiaries also have the option to make a spousal pass into their IRA. This option is never available to non-spouse beneficiaries.
Discuss the risks and opportunities
Marriage changes life. It only makes sense that a customer’s IRA would be significantly affected. When congratulating dumping clients and wishing them well, don’t miss the opportunity to discuss important ways that will affect their IRA. A conversation about marriage and its impact on IRAs can help newlyweds avoid any pitfalls and maximize the chances of their new marital status.
About the author: Sarah Brenner, JD, Director of Retirement Education, Ed Slott & Co. – Sarah has worked for nearly 20 years helping clients solve complex IRA technical questions. She has been a contributing writer for numerous IRA training texts, articles, and handbooks and has been cited in national financial and tax publications such as the CCH IRA Guide. She is an experienced speaker who has educated thousands of professionals in the financial industry including lawyers, professional accountants, bankers, financial advisors and brokers on retirement plan rules. Sarah has been praised for her ability to communicate complex laws in an easy-to-understand manner and to provide practical strategies to clients.
Sarah is a contributing writer and editor for Ed Slott’s IRA Advisor newsletter, which is distributed to thousands of financial advisors across the country, and writes for several areas of the company’s website, Irahelp.com.