How To Benefit From A Spousal IRA As An LGBT Couple

Taxes

Gay Marriage is Now Legal in the US. Which Means LGBT Couples can now benefit from the Spousal IRA. (Photo by Chris Hyde/Getty Images)

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It has come to my attention that many people have no idea what a Spousal IRA is, and who should be using one.  Lack of specific retirement planning knowledge appears to be more common among LGBT married couples.  Most likely, this is because they weren’t available for same-sex couples until we began to reap the benefit of marriage, or more specifically marriage equality.

Ok, you may be thinking, great another retirement account to think about.   The good news here is a spousal IRA could save you several thousand dollars per year in taxes as a couple.  My clients Jan and Fran used a spousal IRA for the first time last year and according to their CPA is saved them over $2800 in taxes between state and federal taxes.  They were thrilled with the tax savings but confused about what the heck a spousal IRA was. They said “David, How does a spousal IRA work?” and  “Why didn’t we do one before?”

Fran and Jan are not alone in being confused by the new Tax Cut and Jobs Act (TCJA) aka the Trump Tax Plan, retirement planning, and the spousal IRA.   Keep reading, and we will explain what a Spousal IRA, how it works, and who should be contributing to one.

LGBT Spousal IRA

Photo is not Fran and Jan, but another Lesbian Couple getting married. (Photo by Matt Jelonek/Getty Images)

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The DEFINITION of a ‘Spousal IRA’

Whether you are gay or straight as spousal IRA is a specific type of retirement account for individuals, which allows a working spouse to contribute to a nonworking spouse’s retirement account.  Normally you have to earn the income yourself to be eligible to fund an IRA each tax year.  The spousal IRA is an exception to this, which can benefit married couples, by allowing them to do a little extra tax planning, and hopefully keep more of their hard earned money.

The Basics ‘Spousal IRA’ works for LGBTQ+ Couples

There are three main requirements to be eligible for a Spousal IRA. 1) You must have enough earned income to cover the amounts contributed to both spouses accounts.  2)You must be legally married. 3) Couples must file a joint tax return.

So, in case it wasn’t obvious, without marriage equality, there would be no Spousal IRA accounts for same-sex couples.

You can fund either a spousal IRA or a spousal Roth IRA, or some combination of the two.  Either way,  you are still subject to the same contribution limits each year.   For 2019, you are allowed to contribute $6000 each to an IRA or Roth IRA.  If you are 50 years or old, you can make an extra $1000 contribution each, per year.  Just a quick reminder, IRA can only be held in one person’s name, so a joint IRA does not exist.

Related: Will the LGBT Community End Up Back in The Closet During Retirement? 

How Spousal IRAs Work for Same-Sex Couples:

There are a few rules and regulations that need to be followed when using a spousal IRA.  To help make this process as seamless as possible, I recommend people work with the tax preparer and gay financial planner when deciding to open and fund a spousal IRA.   Often, we make these choices are the time taxes are being filed.

Both Roth and Traditional IRAs have their own set of rules from the Internal Revenue Service (IRS).  There are a few extra layers of regulation for those wishing to benefit from a spousal IRA.

LGBT couples can now open a Spousal IRA. (Photo by Annette Riedl/picture alliance via Getty Images)

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Spousal IRA Income Limitations:

If you or your spouse are covered by a retirement plan (think 401(k) or 403(b)) at work, your allowable contributions to a spousal IRA will be phased out or reduced above certain income levels.   For the Spousal Roth IRA, in 2019, the income phase-out is on income between $193,000 and $203,000.  For a Spousal Traditional IRA, the contributions limits phase out between $103,000 and $123,000 of income.

If one spouse doesn’t work or is already retired, the Spousal IRA can be a great way to sock away a little extra money for retirement, and lower your current tax liability (assuming you choose the Traditional Spousal IRA).   For my clients Fran and Jan, Jan is already retired, and Fran makes a pretty good income.  We simply moved money from the Jans taxable investment account into her IRA, and voila they have a nice tax deduction that saved them several thousand dollars.

Jan and Fran were lucky to have the $6500 (2018 spousal IRA contribution limit) lying around.  Most couples are going to want to plan a little further ahead to make the spousal IRA contribution.  If you can sock away $500 per month into an investment account ($583.33 per month if over 50) and when tax time runs around you will all the money you need to fully fund a spousal IRA, without breaking a sweat.  Of course, we are assuming it makes sense for your personal financial situation, and you qualify.

I will leave the debate of which is better a Spousal Roth IRA or Spousal Traditional IRA for another time.  The important thing is that you are saving enough for that dream gay retirement.  A spousal IRA is another tool in the financial planning toolbox to help all the fabulous same-sex married couples achieve financial freedom just a little faster and easier.

Once you know you are eligible to contribute to a spousal IRA, your account can be opened at pretty much financial institutions or with your trusted gay financial advisor.   You can even make spousal IRA contributions into an existing IRA. Same goes for a spousal ROTH IRA if you already have a ROTH you can just put the money into that account.

What are you planning for your fabulous gay retirement with your spouse? Inquiring minds want to know.

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