spousal ira

Stop Believing These 5 Myths About IRAs

Alicia Rose Hudnett — Thu, 07 Jun 2018 09:00:21 +0000

Here's an important life lesson you may not have been told in childhood: You will spend your entire adult working years saving for one main goal — retirement. And one type of retirement account that almost everyone has access to is an individual retirement arrangement, or IRA.

IRAs come in two main formats, the Roth and the Traditional. And while both are valuable, they each bring plenty of confusion regarding some of the rules and regulations about saving in these types of accounts. Here are five IRA myths that may be preventing you from using this valuable retirement-savings vehicle.

1. I can't save in a workplace retirement plan and in an IRA

Even if you currently contribute to an employer-sponsored retirement account at work (such as a 401(k)), you can still direct additional funds into a Traditional or Roth IRA. (See also: 401(k) or IRA? You Need Both)

For Traditional IRAs

Anyone under age 70½ with earned income can make contributions to a Traditional IRA. But if you are covered by a workplace retirement plan, the IRS may restrict the deductibility of your contributions. For 2018, if you are covered by a workplace plan, are single, and make less than $73,000, or if you're married, file taxes jointly, and earn less than $121,000, you can contribute to a Traditional IRA and deduct either all or a portion of your contribution.

If you are single and earn $73,000 or more, or if you are married, file taxes jointly, and earn $121,000 or more, you can still make a nondeductible contribution. When you make a nondeductible contribution to a Traditional IRA, you don't receive an upfront tax break, but your money will still grow tax-deferred in the account.

Note: As an alternative to putting nondeductible dollars into a Traditional IRA, some advisers recommend putting this money into a brokerage account instead. That's because even though money in a Traditional IRA grows tax-deferred, distributions are taxed at ordinary tax rates. Meanwhile, although you receive no tax break for investing in a brokerage account, you may be able to get the more favorable tax treatment on your capital gains when you withdraw those funds in retirement. Having said that, this still doesn't discount the need for an IRA. (See also: Where to Invest Your Money After You've Maxed Out Your Retirement Account)

For Roth IRAs

Whether or not you have a retirement plan at work has no bearing on your ability to contribute to a Roth, but the IRS does impose income limits on who can contribute directly to this type of IRA.

For 2018, if you are single and make $135,000 or more, or if you are married, file taxes jointly, and make $199,000 or more, you are prohibited from contributing directly to a Roth IRA. There is a workaround to this rule called a "Backdoor Roth," which involves making a nondeductible contribution to a Traditional IRA, then converting that to a Roth IRA. This is a common and standard practice, but see a financial planner or tax adviser to determine the tax implications for your own specific financial situation.

2. I don't make enough to contribute to an IRA

Every year that you earn income is an opportunity to save for retirement. The government allows you to contribute a certain amount of money each year into tax-sheltered accounts. If you miss a year, you miss saving for that year forever.

Anyone with earned income under the age of 70½ can contribute to a Traditional IRA, and anyone, regardless of age, with earned income (but within the income limits listed above) can contribute directly to a Roth IRA. Even if you are unable to contribute the maximum allowable amount, make a contribution count every single year. And remember that you have until Tax Day of the following year to make your contribution for the current year. (See also: 5 Dumb IRA Mistakes Even Smart People Make)

3. I can't contribute to an IRA if I don't have my own earned income

Unlike other savings accounts, IRAs must have a single owner and can never be titled as a joint account. And up until now, we've pointed out how the first criteria for contributing to an IRA is having your own taxable compensation. But the IRS does make an important exception to this rule for nonworking or low-income earning spouses by allowing them to piggyback off a working spouse's record of yearly income, whereby all the same rules apply. This is called a spousal IRA. This is a smart way for a couple to continue a diligent savings routine even in a one-income household.

4. I don't need an IRA

Let's get this straight: Everyone needs an IRA. Whether by choice or life circumstances, everyone will retire someday. And retirement is expensive. Even if you are already covered by a workplace retirement plan, an IRA can help you capture and save much-needed excess funds that will help you get by later in life.

If you have extra cash sitting in a savings or checking account (not counting your emergency fund), you can begin transferring that money to fund an IRA. As long as you have earned income for the year, it doesn't matter where the contribution money comes from. (See also: 6 Reasons Every Millennial Needs a Roth IRA)

5. I can't touch my money until retirement

The whole purpose of saving for retirement involves taking a long-term view and allowing your money to grow untouched. And it's true that when you use a tax-sheltered account to save for retirement, there will be penalties if you don't follow all the rules. While you always have access to your own money, there are a few guidelines to keep in mind.

In general, if you are younger than 59½, any money you withdraw from a retirement account will be considered an early withdrawal subject to income tax and a 10 percent penalty. But there are important exceptions to the rule, including for medical reasons or even to pay for some higher education costs.

All direct contributions to a Roth IRA are made with after-tax money, so you always have tax-free and penalty-free access to your original contributions. Note that there are different rules for Roth conversions; but if you follow the rules, you can still gain penalty-free access to your funds after a waiting period and possibly before retirement.

Retirement is your most expensive long-term financial obligation, and you'll need to save as much as you can for as long as you can. Don't let myths and misconceptions steer you away from the value of an IRA.

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This article is from Alicia Rose Hudnett of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

9 Surprising Ways Marriage Can Make You Richer

Tim Lemke — Mon, 19 Mar 2018 09:00:06 +0000

Marriage can be a wonderful thing, and not just because of the potential for lifelong companionship. Tying the knot can be a great financial decision, too.

When you get married, you'll be eligible for some key tax breaks, and there are a number of other advantages that will ultimately help you build wealth. Take a look at these examples of how marriage can make you richer.

1. There's a larger standard tax deduction

Under the 2018 tax law, every married couple filing jointly is eligible for a standard deduction of $24,000. That's nearly double from the previous law and exactly twice the standard deduction for single people. This standard deduction is more important than ever, as the new tax law does not allow for as much itemizing of deductions. (See also: 12 Things You Should Know About the New Tax Law)

2. You may save on taxes if filing jointly

Much has been said about the so-called "marriage penalty" in which couples could face a higher tax rate if they file jointly. But in truth, this was not an issue for most people, and the new tax law makes it even less likely that married couples will be penalized.

In fact, in most cases under the 2018 tax law, there won't be much difference between your taxes if you file separately or jointly. But it could be very advantageous for couples to file jointly if one spouse makes considerably more than the other.

To illustrate this, let's say you earn $37,000 in taxable income. Under the 2018 tax law, you'd be in the 12 percent tax bracket and pay $4,440 in tax if filing separately. Now let's say your spouse earns $190,000 per year and pays $60,080, based on the 32 percent tax bracket, also filing separately. If you file jointly instead, you'd report a combined income of $227,000 and would be in the 24 percent tax bracket. You would pay $54,480 in tax, a savings of nearly $10,000.

3. You have more buying power

When you get married, you are pooling financial resources. If both of you have assets and income, then you have greater ability to make purchases. It means you may be more likely to afford a down payment on a home, and have more ability to handle the monthly mortgage. It means you may become more attractive to lenders, though it is worth noting that you will still each have separate credit scores.

4. You can contribute to an IRA even if you don't work

If you want to contribute to an individual retirement account (IRA), you must have earned income. But there are exceptions, most notably in the form of a spousal IRA. With a spousal IRA, each spouse can have their own IRA, as long as one of the spouses has earned income. For most people, the limit of contributions on each account is $5,500 annually, so the total contributions allowed for married couples doubles to $11,000. The only catch to a spousal IRA is that couples must file their taxes jointly. (See also: 4 Ways Couples Are Shortchanging Their Retirement Savings)

5. You can receive Social Security spousal benefits

When you file for Social Security benefits, you can file for your own benefits or under your spouse's. Even if you did not earn any income during your life, you can receive benefits through your spouse. Usually, spousal benefits are up to half your spouse's normal Social Security benefit. You'll also be able to receive spousal benefits even after your spouse passes on.

6. You may spend less on health care

There is considerable evidence that being married can make you healthier. Married couples look out for one another. They keep each other on track regarding diet and exercise, and a spouse is often the first person to notice when you appear unwell.

The Harvard Health blog reported in 2016 that married people tend to live longer, are less likely to be depressed, and have fewer strokes and heart attacks. The report also cites studies showing that married people have better immune systems. This potentially means that your health care expenses could be less than if you remained single.

7. You can get health insurance through your spouse

If one spouse has access to health insurance through his or her employer, they can add a spouse to their plan. This is very helpful when one spouse is not employed or is not offered health insurance through their job. In most cases, family plans offer savings over plans for individuals.

8. Auto insurance is cheaper

Generally speaking, auto insurance companies will charge less to married couples than single people. That's because they tend to see marriage as something a more mature person does. Of course, it helps if both drivers have good driving records; if your spouse has a worse driving record than you, you may not see any savings.

An analysis from Carinsurance.com revealed that married couples can typically see savings of 10 to 15 percent in most states. It's worth noting that insurance companies will offer discounts for multiple cars, as well.

9. You can inherit assets from your spouse without a will

To be clear, no one is suggesting you should celebrate when your spouse passes away. But it's worth noting that when you are married, you are usually entitled to inherit their assets, even if you don't have a formal will drawn up. Note: Crafting a will is still a very good idea. (See also: Here's What Happens If You Don't Leave a Will)

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This article is from Tim Lemke of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread: