Spousal IRA

[S T]

Question, a scenario I have not encountered before

Husband is a sole proprietor and in 2015 is age 70.5-71 - he has a traditional IRA account that he must now start to withdraw RMD and can no longer contribute to. Still active in the business (Schedule C - no employees) and also has a SEP IRA which he can still contribute to.

Spouse has no income age 59 - works in the business - no reportable income

Can spouse contribute to a "spousal traditional IRA" even though husband is not eligible?

What are options? Taxpayer would like the RMD from husband to be distributed and then contributed to Spouse account to eliminate any tax and then build up under the Spouse account

Issue the spouse a 1099 for income equal to the amount of the RMD?

Social Security has advised it is not beneficial to contribute to spouse account at this time as she will receive a higher benefit on the husband's account at retirement.

Anyone have some insight and tax planning suggestions

Thanks

Sandy

[kathyc2]

Wife is eligible to contribute to spousal as long as schedule C income is high enough to support it.

It doesn't matter where the actual money comes from. H could receive a check for his RMD, deposit it, and then write a check to fund W IRA. So, you would have taxable IRA distribution and deductible IRA contribution which would wash to no net change to AGI.

"Issue the spouse a 1099 for income equal to the amount of the RMD?" Are you saying a 1099 to W from Sch C business? No need to do that.

Planning would depend on financial situation, current tax rate, projected future tax rate, etc. If W qualifies for HSA, that would be a better offset use of money than an IRA. Also, depending on financial situation it may be better to bite the tax bullet now and put RMD money in Roth for W. For example if in 15% marginal, and RMD is 5K, is it better to pay tax on the RMD now or on the higher amount when W is required to take it as RMD?

[JohnH]

I really like Kathy's suggestion to consider the Roth.
It might be well worth foregoing the tax deduction in order to fund the Roth and never have to worry about RMD's on that money.

If they are in the 15% marginal bracket, it's virtually certain to be the better choice.

Assuming the same investment vehicle is used, either the traditional or the Roth will have the same balance over time.
Whenever withdrawal time comes, each dollar in a traditional IRA may be worth only 65-70 cents after the tax haircut.
But each dollar in the Roth will always be worth a dollar.

[kathyc2]

Thanks John. The only thing I like better than Roth's for moderate income clients are HSA's.

Sandy, if they are charitable people they might also want to consider a direct to charity distribution for all/part of RMD to bypass AGI. Making the assumption that Congress will extend it again when they actually get around to doing their jobs.

[S T]

Delayed thanks for replies

Update, Spouse established a Traditional IRA at Vanguard, however, Vanguard is saying it is NOT valid IRA deductible account without source of income, as in W-2 or Form 1099. This is for year 2015. Spouse is not being reported as an employee or independent contractor through the business reported on Schedule C.

We need to provide information to Vanguard, that this account is a "spousal" IRA based on husband's net Schedule C income, which I believe would be allowed.

I have tested on a preliminary 2015 Tax Return, and it appears it would be allowed as a IRA deduction.

Any suggestions

Thanks

Sandy

[Lion]

https://www.irs.gov/Retirement-Plans/Plan-Participant,-Employee/Retirement-Topics-IRA-Contribution-Limits

https://www.irs.gov/pub/irs-pdf/p590a.pdf pages 9 & 11

Explain to Vanguard what a Spousal IRA is and show your computation that the taxpayer has enough earned income to cover both his and her retirement plan contributions. Pretend the broker is your tax student in a basic course!

[Rapid Robert]

Vanguard is saying it is NOT valid IRA deductible account [...] We need to provide information to Vanguard, that this account is a "spousal" IRA

Since when is Vanguard responsible for determining whether there was an excess contribution, an allowable deduction, or whatever? What if someone wants to open an account in January, will Vanguard refuse because their earned income for the year is not known yet?

You should not need to provide them any information other than name, address, TIN, DOB, and maybe some kind of 3rd party ID like driver's license. It's none of their concern, and ridiculous they should even ask. Find another place to open an account, there are plenty.

[Roland Slugg]

Sandy, you as well as some of those who have replied above seem to be connecting several unconnected issues.

The W can contribute to an IRA as long as there is adequate earned income on the return she is filing ... a joint return with her H in this case. There is no need to arrange for H to pay W and issue a 1099 to her. In fact it might very well be counterproductive. H's social security benefit might be negatively affected, and hers might not be positively affected.

There is no connection between the H's RMD amount and the W's allowable IRA contribution. W's IRA contribution will be $6,500 (or less if inadequate income or cash to fund it), whereas H's RMD might be $2,000, $20,000, $50,000 or any other amount. The person who said the H's RMD and the W's IRA contribution would exactly offset each other, resulting in no change in their AGI is assuming a rather remarkable coincidence in the amounts of each.

If Vanguard told the client that she could not open an IRA, I would lay long odds that Vanguard was given incorrect facts. She can open an IRA at Vanguard online ... no questions asked. Rapid Robert's reply above is quite correct about this.

Finally, for those who say the W should contribute to a Roth IRA, I ask, "How do you know?" The OP said nothing about the T/P's taxable income. It might be $5,000, or it might be $500,000.

[kathyc2]

Finally, for those who say the W should contribute to a Roth IRA, I ask, "How do you know?" The OP said nothing about the T/P's taxable income. It might be $5,000, or it might be $500,000.

Didn't say they "should" but rather it may be something to consider depending on their overall tax situation.