IRA Rules That Benefit Individuals Who Are Married Or Getting Married During 2022

When it comes to Individual Retirement Arrangements (IRAs), marriage definitely has some benefits. This column presents three IRA benefits that many married couples may be able to take advantage of that could result in enhanced saving for the married couple’s future retirement. The information presented is especially important for those federal employees who are married or who will be marrying during 2022, as well as to federal employees once they are fully retired.

Benefit #1.

In general, in order to contribute to any type of IRA (traditional IRA or Roth IRA) in any year, an individual must have received some type of taxable compensation (salaries, wages, or net self-employment) during that year. The exception is a nonworking spouse who can make a “spousal IRA” contribution to his or her own IRA provided that the other spouse has taxable compensation.

Individuals can contribute to an IRA even if they are covered by another retirement plan. For federal employees, another retirement plan includes a CSRS annuity or a FERS annuity, and the Thrift Savings Plan (TSP). If one spouse is not working but the other spouse is a federal employee who, for example, is covered by FERS and contributes to the TSP, then the nonworking spouse (for example, a “stay-at-home dad or mom”) is eligible to contribute to his or her IRA based on their spouse’s taxable compensation for the year. This is called a “spousal IRA”.

The nonworking could make spousal IRA contributions in some years, and once this spouse returns to the workforce, he or she can make regular IRA contributions to their IRAs during those working years in which he or she has taxable compensation.

For 2022, the maximum contribution to an IRA is the smaller of:

(1) $6,000 ($7,000 if age 50 or older at the end of 2022): or

(2) Compensation. For many individuals, the Roth IRA for many employees is a better choice compared to the traditional IRA.

This is because while there is no current year tax savings when a contribution is made to a Roth IRA, post-age 59.5 withdrawals from a Roth IRA are income tax free. Also, post-age 59.5 Roth IRA withdrawals are not included in adjusted gross income (AGI) and can especially benefit individuals enrolled in Medicare B (Medical Insurance) who pay a monthly premium for Medicare Part B based on their annual AGI. The higher one’s AGI, then potentially the higher one’s Medicare Part B monthly premium. Because qualified (post-age 59.5) Roth IRA withdrawals are not included in one’s AGI, potentially the less the individual could pay in Medicare Part B premiums.

The only restriction associated with Roth IRAs is the fact that there are income limitations for contributing to a Roth IRA. The following table summarizes the modified adjusted gross income (AGI) limits for contributing to a Roth IRA for the year 2022:

Note the higher modified AGI phase-out limits for married filing joint compared to single. For two single individuals who are getting married during 2022, this could mean that they could both contribute to a Roth RIA for 2022, whereas if they were filing as single either one or both spouses could not contribute to their Roth IRAs for 2022.

The following example illustrates:

Example. Jerry, age 46, expects to have a modified AGI of $150,000 during 2022. His fiancé Julie, age 42, to whom he will be getting married to on October 22, 2022, expects to have a modified AGI of $50,000 during 2022. If Jerry were not to get married during 2022 and therefore be filing his 2022 income taxes as single, he would not be eligible to contribute to his Roth IRA. This is because his modified adjusted gross income of $150,000 exceeds the limit of $144,000. Julie would be able to contribute to her Roth IRA for 2022 because her modified adjusted gross income of $50,000 is less than the limit of $129,000. Assuming Jerry and Julie marry, their combined modified adjusted gross income of $200,000 during 2022 will allow Jerry to make his $6,000 Roth IRA contribution because the $200,000 is less than the $204,000 modified adjusted gross income limitation for individuals filing as married filing jointly.

Benefit #2.

A married individual could be eligible to use the IRS’ Joint Life Expectancy Table for required minimum distributions (RMDs). When a traditional IRA owner reaches age 72, he or she must start taking annual distributions, called required minimum distributions (RMDs) from their traditional IRAs.

The RMDs are calculated by using life expectancy tables provided by the IRS (IRS Publication 590-B). IRA spousal beneficiaries who are more than 10 years younger than the IRA owner are eligible to use the Joint Life Expectancy Table. Use of the Joint Life Expectancy Table can result in smaller RMDs versus using the Uniform Lifetime Table which is required to be used to calculate RMDs for all other traditional IRA owners (including a married individual for whom the assumed beneficiary is a spouse within 10 years of age of the spouse who is traditional IRA owner). The Uniform Lifetime Table has smaller life expectancies usually resulting in larger RMDs.

Benefit #3.

A married individual has special benefits as a spousal IRA beneficiary. A married individual has benefits even after the death of their spouse. The prime benefit is that only a spousal beneficiary can rollover or transfer an inherited IRA from a deceased spouse’s IRA into their own IRA. This is known as a “spousal rollover”.

There is no time deadline for a spousal rollover. Once the spousal rollover is completed, the funds rolled over from the deceased spouse’s IRA funds are treated like any other IRA funds that the surviving spouse already owns. There are no RMDs until the surviving spouse becomes age 72. Non-spousal IRA beneficiaries do not have this rollover option to their own IRA.

However, it should be emphasized that not every spousal IRA beneficiary will want to make a spousal IRA rollover after the death of their spouse. In some cases – in particular a surviving spouse who is younger than age 59.5 – it makes more sense to keep an inherited IRA as is and not rollover the inherited IRA to the spouse’s own IRA.

This is because in order to make penalty -free (no 10 percent early withdrawal penalty) withdrawals from one’s traditional IRA, the traditional IRA owner must at least be age 59.5. There is no minimum age requirement with respect to a surviving spousal IRA beneficiary making withdrawals from an inherited IRA.

A spousal IRA beneficiary can also take advantage of a rule that is unavailable to non-spousal IRA beneficiaries. If a surviving spouse is the sole beneficiary of the deceased spouse’s traditional IRA, and if the deceased spouse died before his or her required beginning date (this is the date in which RMDs begin) then the surviving spouse can delay RMDs from the inherited IRA until the year the deceased spouse would have attained age 72. That can mean a delay of many years before RMDs from the inherited IRA must be taken. The delay can result in years of tax-deferred and compounded growth.

Those married federal employees and retirees who are interested in increasing their IRA participation and who have questions about how the three benefits discussed may apply to them are highly encouraged to speak with a knowledgeable financial advisor.