What are Spousal IRAs & Who Can Contribute to One?
Spousal IRAs are designed to allow a working spouse to make IRA contributions for a spouse who does not have enough earned income to make their own IRA contributions.
There are some key requirements that must be met:
- The spouses must be legally married and file a joint federal tax return. This includes same-sex couples.
- The spouse receiving the contribution must have less compensation, or no compensation, than the spouse making the contribution.
- The IRA account must be held in the name of the spouse for whom the contribution is made. If Gina is the working spouse and the contribution is made for George, then the IRA account must be in George’s name. George has complete control over the IRA account. He can name his own beneficiaries, invest the funds as he wishes, and take withdrawals whenever he wants.
Do you think you understand all the rules that govern your Roth IRA? Not so fast! There are many misconceptions as to how these complicated accounts work. Here are 5 Roth IRA facts that might surprise you:
1. You are never too old to contribute. If you have earned income and your modified adjusted gross income is below a certain level, you can contribute to a Roth IRA. Your age does not matter. This often comes as a surprise to taxpayers because you cannot contribute to a traditional IRA once you reach the year you turn 70 ½. Roth IRAs are different. Age is never a barrier to making tax year contributions.
Here are six things to know about investing IRA funds in Bitcoin.
Bitcoin is receiving a surge of publicity as a possible IRA investment, and a number of new firms have recently started targeting the “Bitcoin IRA” market.
1. There is no such thing as a “Bitcoin IRA.” Although the term is often seen in the media and advertising, there is no such thing any more than there are “stock market IRAs.” Legally, a “Bitcoin IRA” is simply an IRA like any other, except that its custodian permits investments in Bitcoin.
2. Bitcoin is not an “IRS Approved” investment. This claim is frequently made in advertising, but the IRS does not approve investments. In fact, the IRS has issued a notice specifically to IRA owners headlined “The IRS Does Not Approve IRA Investments” and warning against what it calls the “Fraudulent ‘IRA Approved’ Sales Pitch.”
IRAs can invest in Bitcoin simply because they are allowed to invest in almost anything except collectibles and life insurance. When the term “IRS Approved” misleadingly implies some sort of endorsement, it may cast doubt on the bona fides of the party making the claim. The IRS warns: “Avoid any investment touted as ‘IRA Approved’ or otherwise endorsed by the IRS.”
In many households, married couples divvy up the responsibilities; one will handle the bills and banking while the other cooks and does the grocery shopping, or one will do the laundry while the other manages the yard work and house. This split often extends to annual income tax responsibilities, even in couples who use a professional preparer. However, when couples submit joint returns, both are jointly and severally liable for the information included in the return. That means if there’s an underpayment, both spouses are going to be liable for the debt.
The tax code does provide means by which a spouse can be relieved of this joint and several obligation. As you can imagine, these exceptions are technical and very fact specific. Recently, the U.S. Tax Court issued two rulings on one of those exceptions; the relief for the innocent spouse. In one case, relief was granted; in the other, relief was denied. What separated these cases?
Essentially, what separated these cases was the IRS’s ability to prove that the spouse requesting relief had actual knowledge, or should have known, that a misrepresentation was being made. In the first case, the couple separated in 2014 and divorced in 2016. The return at issue was filed in 2014 and did not include an IRA distribution that was deposited into their joint checking account. Although they were living separately at the time, the couple continued to use a joint checking account for all purposes until their eventual divorce. Both had access to this account and regularly made transactions from the account. For tax purposes, they sent their information separately to a third-party preparer. However, the ex-wife was generally responsible for any information related to her inherited IRA.
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Image courtesy of Stuart Miles at FreeDigitalPhotos.net
As you prepare your 2017 tax return, use the information you collect both to make the best IRA contribution choices for 2017 and plan IRA actions for 2018. Six ways to consider:
1. Maximize IRA Contributions for 2017
2017 IRA contributions can be made until April 17, 2018, the due date for 2017 tax returns. The maximum IRA contribution for both 2017 and 2018 is $5,500 ($6,500 for persons age 50 or older) or the amount of earned income, whichever is less. However, the amount of modified adjusted gross income (MAGI) reported on your tax return may limit:
- The maximum contribution to a Roth IRA
- The allowable tax deduction for a contribution to a traditional IRA, for persons covered by an employer’s retirement plan
These IRA limits for 2017 can be seen at https://www.irahelp.com/2017.
What is an Health Savings Account (HSA)?
A Health Savings Account is a tax-advantaged medical savings account that can be used tax-free for qualified health expenses. HSAs are designed to be used in conjunction with a High Deductible Health Plan (HDHP). HSAs offer triple tax advantages: contributions are deductible, earnings are tax-deferred while in the HSA, and distributions are tax-free when used for qualified medical expenses.
1. Determine if you are eligible to make an HSA contribution. To be eligible to contribute to an HSA, you must be enrolled in an HDHP. To be an HDHP, a plan must meet certain limits on deductibles and out-of-pocket expenses. These limits are adjusted annually for inflation. You may not contribute to an HSA if you are enrolled in Medicare because Medicare is not an HDHP.
Happy Anniversary to the Roth IRA! Celebrating 20 years in 2018.
IRAs started small. The first IRAs created in 1974 had two purposes:
1. As a retirement savings vehicle for employees not covered by employer retirement plans; and
2. As an account to hold distributions from employer plans on separation from service
These first IRAs could accept annual contributions not exceeding the lesser of $1,500 or 15% of earned income, only from employees who were not covered by an employer’s qualified retirement plan. Distributions from them were subject to still familiar rules — being taxable income at ordinary rates, with required minimum distributions (RMDs) starting at age 70½, and distributions before age 59½ subject to 10% penalty. They could accept rollovers from company plans.
By Jim Glass, J.D.
This is the season for charitable giving. And this year it is especially so for those who want to get the most tax benefit from charity deductions before new Tax Cuts and Jobs Act becomes law. The Act effectively reduces the tax-saving value of the charitable contribution deduction for many.
While details may change, at this writing the Act increases the standard deduction on joint returns to $24,000 from $12,700, on single returns to $12,000 from $6,350, and eliminates many popular itemized deductions. Because taxpayers claim itemized deductions only when their total exceeds the standard deduction, lawmakers project that under the Act the number of taxpayers who itemize deductions may be reduced by half or more.
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What is a disclaimer?
A disclaimer is a formal refusal of an inheritance (or part of an inheritance) by a beneficiary. By creating a “path” for disclaimed assets to follow, a skilled planner can provide a beneficiary with the option to pass assets to alternate beneficiaries.
1. Make sure the IRA owner names contingent beneficiaries. Naming a contingent beneficiary directly on the beneficiary form is good practice and a pivotal part of most disclaimer planning. When a disclaimer is executed, the person making the disclaimer is treated as if he or she had predeceased the IRA owner. The contingent beneficiary would then inherit the property. If there is no contingent beneficiary listed, often the funds will default to the estate of the deceased IRA owner.