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An individual retirement account (IRA) provides an excellent opportunity to invest for the future. There are limitations surrounding the amount you can contribute to an IRA, including special rules that apply to married taxpayers!

The amounts earned in a traditional IRA are not taxed until distributions are made, plus the contributions you make to the IRA may be deductible. As an alternative, a Roth IRA is not deductible but allows for tax-free earnings and no tax at distribution.

Deductible IRA contribution amounts have generally increased over the last few years. And, if you are at least 50 years old by the end of the tax year, you can make an additional $1,000 “catch-up” contribution to your IRA.

A taxpayer’s contribution is limited to the taxpayer’s compensation for that year, which means that a taxpayer who earns less than the maximum contribution limit can deduct no more than the compensation amount.

However, special rules apply for married taxpayers so that a spouse who earns little or no compensation can use the wage-earning spouse’s compensation to top off his or her IRA contribution limit. Thus, you may be able to contribute up to $6,000 (or $7,000 if you are 50 or older) to an IRA this year even if you did not work for wages in the current tax year.

Compensation limits that phase out an IRA deduction apply if the taxpayer or the taxpayer’s spouse is an active participant in a qualified retirement plan. For taxpayers who are active participants in a qualified retirement plan, the adjusted gross income (AGI) limits at which the deduction begins to phase out in 2019 are $103,000 for taxpayers filing joint returns, and $64,000 for all other taxpayers. For taxpayers who are not active participants but whose spouses are, the phase out begins at $193,000.

Here is an example of how a spousal IRA can work:

Wendy, age 35, is not employed, but her husband Harold, also age 35, participates in a 401(k) plan sponsored by his employer. The couple files a joint income tax return and reports an adjusted gross income of $130,000. Wendy can make a deductible contribution to a traditional IRA because she is not an active participant in an employer-sponsored retirement plan and she and Harold have a combined adjusted gross income that is below $193,000 (the amount at which the phaseout begins in 2019 if the taxpayer’s spouse is an active participant).

Wendy’s contribution to an IRA could be as much as $6,000 in 2019, since she is less than 50 years old.

The total amount you can contribute to an IRA, and the amount of your income tax deduction for that contribution, depends on the several factors including: your age, the compensation you earn (if any), your combined income with your spouse, whether you participate in an employee-sponsored retirement plan, and whether you and your spouse jointly or separately file your income taxes.

If you have any questions regarding this or any other tax matters, please do not hesitate to contact your L&B professional at (858) 558-9200.


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