Spousal IRA limit increased to $2,000 per spouse
This article is to inform you of increased tax benefits which may be available to you under new rules for "spousal" individual retirement accounts (IRAs). The rules
were enacted as part of the Small Business Job Protection Act of 1996 and were effective starting in 1997. Under the new rules, the amount that a married couple
can contribute to an IRA for a non-working spouse is increased from just $250 to $2,000: the same limit that applies for the working spouse.
As you may be aware, IRAs offer two types of benefits for taxpayers who make contributions to them. First, contributions of up to $2,000 a year to an IRA may
be tax deductible. Second, the earnings on funds within the IRA are not taxed until withdrawn. (Alternatively, the 1997 Taxpayer Relief Act allows you to make
contributions to a Roth IRA starting in 1998. There is no deduction for Roth IRA contributions, but, if certain requirements are met, distributions are entirely
tax-free.)
In general, an IRA contribution is allowed only if the taxpayer has compensation. "Spousal" IRAs are an exception. That is, they allow a contribution to be made for
a non-working spouse. Formerly, however, the additional amount that could be contributed for the non-working spouse was just $250. Thus, the maximum
contribution for spousal IRAs was $2,250: $2,000 for the working spouse, plus $250 for the non-working spouse. Starting in 1997, as long as the couple together
have at least $4,000 of earned income, $2,000 can be contributed to an IRA for each, for a total of $4,000. (The contributions for both spouses can be made to
either a regular IRA or a Roth IRA, or split between them, as long as the combined contributions don't exceed the $4,000 limit.)
What's more, the Taxpayer Relief Act of 1997 eased the rules for deductions of contributions to spousal IRAs. Before 1998, for married couples filing jointly with
adjusted gross income (AGI) of $50,000 or more, no deduction for contributions to a spousal IRA was available if either spouse was a participant in an employer's
qualified retirement plan. But starting in 1998, a deductible contribution of up to $2,000 can be made to the IRA of the non-participant spouse as long as the
couple's AGI doesn't exceed $150,000. The $2,000 limit is phased out for AGI between $150,000 and $160,000.
If you would like to discuss the above or if you would like to discuss IRAs or your retirement planning in general, please feel free to contact our offices at your
convenience.
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