Thursday, August 18, 2011

Spousal IRA Contributions, Roth Conversions, Social Security Funds Highlight Mailbag

What are the spousal IRA contribution rules? What benefits will a Roth conversion have for legacy planning?  Can I use Social Security money to fund my wife and I's joint retirement account? We answer those questions in this week's Slott Report Mailbag.  As always, we stress the importance of working with a competent, educated financial advisor to keep your retirement nest egg safe and secure. Find out at this link.


In going through my yearly IRA statements, I just discovered a big mistake I made five years ago. My wife and I are in our 60s, she retired in July 2005 and I retired in July 2006. I put $5,000 each into both our Roth IRAs in February 2006 for 2006, however my wife had no work-related income for 2006, now what do we do about that contribution into my wife's Roth?

Robert Smith

Robert, the spousal IRA contribution rules allow lower compensated (or non-compensated) spouses to use a working spouse's compensation when determining their IRA contribution limit. The contribution limit for the lower compensated (or non-compensated) spouse is based on the spousal IRA contribution rules. The contribution for each spouse is the lesser of:

A. The annual IRA contribution limit, OR
B. The combined compensation of both spouses, reduced by the actual IRA contribution of the highest compensated spouse.

Each spouse may choose whether he or she wants to contribute to a traditional IRA or a Roth IRA. One spouse may contribute to one, while the other spouse chooses the other option. Please consult your tax advisor when trying to determining these limits and the corresponding rules.


I am age 70 1/2 and started my Required Minimum Distributions. I have about 5 million in IRA accounts. How can I save taxes? Should I try a Roth conversion on some of the money? If my wife gets my IRA after my death, can she name a beneficiary (son) to make a stretch IRA?


Dave, it is rather difficult to save current income taxes. However, you can convert some or all of your traditional IRA to a Roth IRA. You will have to pay the income taxes on the pre-tax amount your convert, but it will stop the RMD bleeding. A Roth IRA has NO RMDs. If income tax rates go up in the future, you may be glad you converted now when the rates are low. If you decide to convert you must take your 2011 RMD out first if you haven't already taken it.

If your wife is your primary beneficiary of your IRAs, she can do a spousal rollover, making it her own account, and then name your son as her primary beneficiary. At her death, your son can do an inherited IRA, name his own beneficiary, and take RMDs based on his attained age a year after her death.


Dear Ed and Company,

I am thinking about starting to take my Social Security early. I am 63 and retired. My spouse is working full time, making between $60,000 and $80,000 a year of earned income. She contributes $8,000 to a tax-deferred retirement account and contributes to a pension plan. I would use the Social Security money to put $6,000 in her Roth IRA and $6,000 in my Roth IRA. I assume the most I can put into our retirement accounts is $20,000 per year. Is this a good strategy, or am I overlooking something better?

Thank you,

Jerry Baier

Jerry, because you and your spouse are over the age of 50, you both can contribute up to $6,000 a year to an IRA. You must, however, have earned income to do so. Your spouse is still working so she would have no problem meeting the earned income requirement. You will find a helpful chart to determine what IS and what IS NOT earned income by visiting this LINK. The article "You Must Have Earned Income to Contribute to an IRA" will spell it all out for you. The Social Security website will have helpful information on when to claim your Social Security benefits. You should consider talking to a financial advisor (like one trained by us) to help you work through the decision. One thing to consider is how the Social Security income will affect your income taxes.

By Marvin Rotenberg and Jared Trexler
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*Copyright 2011 Ed Slott and Company, LLC


Anonymous said...

Marvin / Jarred

Your response has me confused. I am aware Social Security benefits are not earned income. Why can’t Jerry make an IRA (traditional or Roth) contribution under spousal earned income exception? His wife’s earned income is more than enough to make a $6,000 contribution on behalf of her husband and herself.

Thank you

Brian Dobbis
[email protected]

Jared Trexler said...

Brian --

Our answer to Jerrry's question is right. And your addition is also right. We even explained the spousal earned income exception in the answer to Robert's question above (question #1). Because of Jerry's wife's earned income, a $6,000 contribution can be made on behalf of both spouses. Thanks for pointing out the addition.

Jared Trexler
Managing Editor
The Slott Report