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The overlooked tax break for married couples: Spousal IRAs

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  • Spousal IRAs allow a working spouse to contribute to a non-working spouse's retirement savings, offering significant tax benefits.
  • Contributions to Spousal IRAs can be made to either Traditional or Roth IRAs, each providing distinct tax advantages.
  • Married couples can benefit from combined federal estate and gift tax limits, higher standard deductions, and potential lower tax brackets.

Marriage brings numerous joys and challenges, but one often overlooked benefit is the array of tax advantages available to married couples. Among these, the Spousal IRA stands out as a powerful tool for optimizing retirement savings and securing financial stability. This article delves into the specifics of Spousal IRAs and how they can benefit married couples.

A Spousal IRA is a type of individual retirement account that allows a working spouse to contribute to an IRA on behalf of a non-working or low-income spouse. This provision is particularly beneficial for couples where one partner dedicates their time to family care or other non-income generating activities. According to the IRS, for tax year 2023, each spouse can contribute up to $6,500 to their respective IRAs, with an additional $1,000 catch-up contribution allowed for those aged 50 and above.

Tax-Deferred Growth and Tax-Free Withdrawals

Spousal IRAs can be set up as either Traditional IRAs or Roth IRAs, each offering distinct tax advantages. Traditional IRAs allow for tax-deferred growth, meaning contributions are made with pre-tax dollars, and taxes are paid upon withdrawal during retirement. This can be particularly advantageous for couples expecting to be in a lower tax bracket post-retirement. On the other hand, Roth IRAs offer tax-free withdrawals, as contributions are made with after-tax dollars, and both contributions and earnings grow tax-free.

Maximizing Retirement Savings

The ability to contribute to two separate IRAs can significantly enhance a couple's retirement nest egg. For instance, in 2023, a couple under 50 can contribute a total of $13,000 ($6,500 each), and if both are over 50, they can contribute up to $16,000 annually. This dual contribution strategy not only maximizes retirement savings but also provides substantial tax benefits, as these contributions can reduce the couple's taxable income.

Estate and Gift Tax Benefits

Married couples also enjoy combined federal estate and gift tax limits, allowing them to give away more money without triggering taxes. For tax year 2023, the annual gift tax exclusion amount is $17,000 per person, per recipient. This means each spouse can gift $17,000 to any number of individuals annually without incurring gift taxes, effectively doubling the tax-free gift amount to $34,000 per recipient.

Additional Tax Advantages

Beyond Spousal IRAs, married couples can benefit from several other tax advantages:

Lower Tax Bracket: If one spouse earns significantly less, their combined income may fall into a lower tax bracket, reducing overall tax liability.

Higher Standard Deduction: For tax year 2023, the standard deduction for married couples filing jointly is $27,700, compared to $13,850 for single filers.

Charitable Contributions: Couples can potentially deduct a greater amount of charitable contributions, as the deduction limit is based on combined income.

Estate Tax Exemption: Money left to a spouse is not subject to federal estate tax, protecting the deceased spouse’s estate from taxation until the surviving spouse's death.

Spousal IRAs represent a significant yet often overlooked tax break for married couples. By allowing contributions to a non-working spouse's retirement account, they provide a means to maximize retirement savings and enjoy various tax benefits. Couples should consult with a financial advisor or tax professional to determine the best strategy for their specific financial situation. Embracing these tax advantages can pave the way for a more secure and comfortable retirement.

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