Maximizing Tax Savings: The Overlooked Opportunity of Spousal IRA Contributions

As the year-end approaches, Americans seek ways to reduce their 2023 taxes, and one often overlooked option is a spousal IRA contribution. This strategy can be advantageous for married couples, particularly when one partner earns less or nothing at all.

Eligible couples can double their contributions to traditional IRAs, deducting up to $15,000 instead of $7,500 for 2023, if completed by April 15 this year (April 17 in Maine and Massachusetts). Alternatively, they can contribute to Roth IRAs without a deduction.

Initially introduced in the 1970s and expanded in the mid-nineties, spousal IRA contributions provide an incentive for unpaid or lower-earning spouses to save for retirement. While historically beneficial for couples with one partner temporarily out of the workforce, they are now increasingly popular among retirees and working spouses.

Financial planners like JoAnn May often recommend these contributions, citing their ability to reduce reported income and potentially qualify for additional savings, such as property tax freezes for seniors in certain states.

For Roth IRA contributions, the advantages include tax-free growth and withdrawals, while deductible contributions to traditional IRAs can lower taxable income, leading to potential savings in various areas of federal and state tax laws.

Understanding the basics of spousal IRA contributions is crucial. Contributions go into individually owned accounts, and both spouses must have earned income at least equal to the total IRA contributions. The contribution limits for 2023 are $6,500 for savers under 50 and $7,500 for older savers.

Notably, spousal IRA contributions are based on the couple’s joint earnings, allowing the higher earner’s income to fund the IRA for the lower earner. However, income limits apply, particularly for tax-deductible contributions to traditional IRAs.

For 2023, spouses can make full or partial contributions to Roth IRAs if their modified adjusted gross income is under $228,000. Income limits for tax-deductible contributions to traditional IRAs vary based on participation in workplace retirement plans like 401(k)s.

Navigating these rules can be complex, but understanding them can lead to significant tax savings for eligible couples. It’s essential to consult with a financial advisor or tax professional to determine the best approach based on individual circumstances.