By Sarah Brenner
Wedding season is upon us. Getting married changes many things, including saving for retirement. If a couple is tying the knot, the wedding will have important consequences for the new spouses’ IRAs. Here are five IRA rules every bride and groom must know.
1. Spousal Contributions Become Available
When a person gets married, he gains a new way to fund IRA contributions. Generally, to make an IRA contribution, an individual must have compensation (typically W-2 income or net earnings from self-employment). A client who is single and has no compensation is out of luck. However, a special rule applies for those who are married. A married person can use a spouse’s compensation to fund an IRA contribution. If a married couple has enough compensation, each spouse can fully fund an IRA for the year. For 2022, that could mean combined IRA savings of $14,000 if both spouses are age 50 or over this year. This can be a big benefit if one spouse is outside the workforce taking care of children or elderly parents.
2. Roth IRA Contributions and Traditional IRA Deductions May Be Affected
Getting married means no longer being able to file taxes as a single payer. Clients have to choose either married filing jointly or married filing separately. That has an immediate impact on their ability to make Roth IRA contributions for the year. The contribution limits are now based on the couple’s joint income.
This means that some newlyweds may no longer qualify to make Roth IRA contributions. Their income may be too high. It also means that any contributions they might have already made for the year could become excess contributions. Advisers can help by fixing any excess Roth IRA contributions in a timely manner and by exploring backdoor Roth IRA conversions for those newly married clients who do not want to lose their ability to fund a Roth IRA.
This strategy, which was threatened by proposed legislation in Congress last year, survived and is still available. Clients whose income is too high to directly contribute to a Roth IRA can make nondeductible traditional IRA contributions and then, minding the pro-rata rules, can convert those contributions to Roth IRAs.
On the traditional IRA side, getting married may mean that that a person may no longer be able to deduct contributions. If a client is not covered by a company plan, marriage may have a negative tax impact. A single 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 company plan is not so lucky. If the other spouse is an active participant, the ability of the non-participating spouse to deduct a traditional IRA contribution phases out at certain income levels. Clients may want to revisit any traditional IRA contributions already made in 2022. There is still time to remove them as unwanted contributions if they are no longer deductible.
A good alternative may be to claim the contribution as nondeductible and then convert it using the backdoor Roth IRA conversion strategy.
3. Penalty-Free Distributions for a Spouse’s Needs Become Available
Marriage has benefits when it comes to accessing IRA funds penalty-free. While an IRA is intended for retirement, distributions can be taken at any time. In most cases, if an IRA owner is under age 59½, those distributions will be taxable and subject to a 10% early distribution penalty. However, there are exceptions to the 10% penalty. Some of those exceptions take a spouse’s needs into consideration.
Penalty-free distributions are available to pay for deductible medical expenses. These are qualified medical expenses that exceed 7.5% of adjusted gross income. Qualified medical expenses include a spouse’s expenses. Clients can also take a penalty-free distribution to pay for a spouse’s higher education expenses. Such expenses include post-secondary tuition, fees, books, supplies and required equipment. The student could be full time or part time.
4. Some IRA Owners May Be Able to Take Smaller RMDs
Weddings are not only for young clients. Older clients may be tying the knot too. Older persons who get married may see their required minimum distributions (RMDs) affected. Usually, an RMD is calculated using the IRS Uniform Lifetime Table. However, for clients who are married to a spouse who is more than 10 years younger and is the sole primary beneficiary of their IRA, there is a special rule. They calculate their RMD using the IRS Joint Life Expectancy Table instead. What is the benefit? The RMD will be smaller. This can be an advantage for IRA owners who do not need the money and want to minimize taxable income.
5. Beneficiary Forms Should Be Updated
Marriage is a time for clients to review their IRA beneficiary designation forms. Don’t overlook this important task. If an account holder wants a new spouse to be his IRA beneficiary, then the IRA beneficiary forms should be changed and sent to the IRA custodian to reflect the change.
When it comes to inherited IRAs, spouse beneficiaries have options that are not available to non-spouse beneficiaries. If your client is the beneficiary of his spouse’s IRA and the spouse died before starting RMDs, the surviving spouse may be able to delay RMDs from the inherited IRA for many years. Sole spouse beneficiaries also have the option to do a spousal rollover to their own IRA. This option is never available to non-spouse beneficiaries.
Discuss the Pitfalls and Opportunities
Getting married is life changing. It only makes sense that a client’s IRA will also be significantly affected. When congratulating clients who are taking the plunge and wishing them well, don’t miss the opportunity to discuss the important ways getting hitched will affect their IRA. A conversation about marriage and its impact on IRAs can help newlyweds avoid any pitfalls and maximize the opportunities of their new marital status.
About the author: Sarah Brenner, JD, Director of Retirement Education, Ed Slott & Co. — Sarah has worked for almost 20 years helping clients solve complex technical IRA questions. She has been a contributing writer for many IRA texts, articles and training manuals and has been quoted in national financial and tax publications such as CCH IRA Guide. She is an experienced speaker who has educated thousands of professionals in the financial industry including attorneys, CPAs, bankers, financial advisers and brokers on retirement plan rules. Sarah has won praise for her ability to communicate complex laws in an easy-to-understand way and provide practical strategies for clients.
Sarah is a contributing writer and editor for Ed Slott’s IRA Advisor newsletter, distributed to thousands of financial advisors nationwide, and writes for several areas of the company’s website, irahelp.com.
