Although the 2024 tax year concluded a little more than two months ago, there is still one tax deduction that may be available to some federal employees and retirees that could reduce their 2024 federal and state income tax liabilities. This tax deduction is a spousal traditional IRA contribution. Unfortunately, many married tax filers overlook the spousal IRA contribution tax break. It can particularly benefit married couples when one spouse earns significantly less salary (or no salary) than the other spouse.
Married couples can use a spousal IRA contribution to double their contributions to a traditional IRA and then possibly deduct on their 2024 federal income tax return as much as $16,000 ($8,000 per spouse) if both spouses were at least age 50 as of December 31,2024. They can deduct a maximum of $14,000 ($7,000 per spouse) if both spouses were younger than age 50 as of December 31,2024. To do so, they must make their traditional IRA contributions no later than April 15, 2025, the federal income tax filing deadline. April 15,2025 is the deadline even if an individual requests a six-month extension to file their 2024 federal income tax returns.
Spousal IRAs started in the mid-1970’s and have been useful particularly for married couples in which one spouse temporarily leaves the workforce to care for children or for elderly parents. Also, today many “baby boomers” are using spousal IRAs when one spouse is retired, and the other spouse continues to work.
Spousal IRA contributions can also be made to a Roth IRA. The advantage of the Roth IRA is that while there is no tax current year tax benefit in the year of a Roth IRA contribution (this is because the contributions to the Roth IRA were made with after-taxed dollars) the Roth IRA accrues earnings over time within the Roth IRA. Provided certain conditions are met, withdrawals from a Roth IRA are completely tax-free. But Roth IRA contributions can be withdrawn tax-free and penalty-free at any time. This is because Roth IRA contributions are always made with after-taxed dollars.
Contributions to traditional IRAs, including contributions to spousal traditional IRAs, which meet the qualifications as deductible contributions are deducted as an “adjustment to income” on an individual’s federal income tax return, thereby reducing adjusted gross income (AGI) and reducing taxable income. Reduced taxable income results in reduced federal and state tax liabilities. Reduced adjusted gross income (AGI) can also result in other tax savings via tax deductions and tax credits. Traditional IRA contributions for tax year 2024 that are deductible as an “adjustment to income” are reported on the 2024 IRS Form 1040 Schedule 1 line 20, as shown here:
The downside to making deductible traditional IRA contributions is that the IRS rules for making these contributions are confusing. The following are the IRS rules with respect to making deductible traditional IRA contributions for tax year 2024.
Rules for Making Spousal IRA Contributions for Tax Year 2024
- At least one spouse must have earned income during the year for which the IRA contribution is made. Earned income includes salary/wages or self-employment net income. Note that investment income (interest, dividends and capital gain income), Social Security monthly benefits, and retirement income (such as TSP withdrawals and CSRS/FERS annuities) are not considered earned income.
- The 2024 spousal IRA contribution is limited to the lower of $7,000 for spouses younger than age 50 as of December 31,2024 and the amount of either spouse’s 2024 earned income. For spouses over 50 as of December 31, 2024, the 2024 spousal IRA contribution is limited to the lower of $8,000 and the amount of either spouse’s 2024 earned income.
The following example illustrates:
Example 1. Howard and Lisa are married, and both are aged 63. Howard is a federal employee and earned $110,000 during 2024. Lisa retired from a private company and earned $5,000 from consulting during 2024. Both Howard and Lisa can contribute $8,000 to their own traditional IRAs for 2024. The deadline for Howard and Lisa to make their 2024 traditional IRA contribution is April 15, 2025.
Income Limitations for Making 2024 Deductible Traditional IRA Contributions
Traditional IRA owners need to be aware of AGI limitations for making deductible traditional IRA contributions. In particular, there are modified adjusted gross income (MAGI) limits that are imposed each year by the IRS in order for single individuals and married couples to make deductible traditional contributions.
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When it comes to married couples, the first question that needs to be asked with respect to the deductibility of their IRA contributions is whether either spouse actively participates in a workplace retirement plan. An example of a workplace retirement plan is a 401(k) or 403(b) qualified retirement plan. For federal employees, contributions to the Thrift Savings Plan and being enrolled in the Civil Service Retirement System (CSRS) or the Federal Employees Retirement System (FERS) are considered as active participation in a retirement plan.
If neither spouse actively participates in a workplace retirement plan, then there are no MAGI limits for deducting each spouse’s contribution to their traditional IRAs. When one spouse actively participates in an employer-sponsored retired plan, for 2024 federal income tax purposes the deductibility of a spousal traditional IRA contribution ends at a MAGI of $230,000. The spouse must also be married to someone who does participate in a workplace retirement plan. If both spouses actively participate in a workplace retirement plan, then both spouses’ traditional IRA contributions are subject to the “phaseout” of the amount of the contribution that is deductible. The “phaseout” begins at $123,000 of MAGI and ends at $142,999 of MAGI during 2024. The following two examples illustrate the deductibility and nondeductability of traditional IRA contributions for 2024:
Example 2. Carol and Mark are a married couple. Carol is age 67 and retired from federal service. Mark is aged 66 and works part-time in a hardware store. Mark’s employer does not offer any retirement plan for employees. During 2024, Mark’s salary was $25,750. Both Carol and Mark are eligible to contribute to an IRA for 2024. Each can contribute the maximum $8,000 to their traditional IRAs because Mark has earned income allowing Carol to contribute to her IRA. Their combined 2024 MAGI was $145,000 and neither Carol nor Mark is an active participant in a retirement plan. Their combined $16,000 traditional IRA contributions are deductible on their 2024 federal income tax return as an “adjustment to income”.
Note that even though Carol is receiving a FERS annuity and making TSP withdrawals, she is retired and therefore not considered as an “active participant” in a retirement plan. Since Mark is also not an “active participant” in a retirement plan, their contributions to their traditional IRAs are full deductible as an “adjustment to income” on their 2024 federal income tax returns, resulting in a total deduction of $16,000.
Example 3. Chris and Joyce are married and both are federal employees. Chris is aged 42 and Joyce is aged 39. During 2024 their MAGI was $162,700. Both Chris and Joyce are active participants in a retirement plan. Both are FERS-covered employees, and each contributes to the TSP. Since their 2024 MAGI exceeds $143,000, neither Chris nor Joyce can deduct on their 2024 federal income tax return the contributions each makes to their traditional IRAs.
Note that Chris and Joyce are eligible to contribute to a “nondeductible” traditional IRA, up to the annual contribution of $7,000 each for 2024. To make sure that the IRS knows that the contributions to their traditional IRAs were made with “after-taxed” dollars, both Chris and Joyce need to report their contributions on IRS Form 8606 (Nondeductible IRAs) and file both Forms 8606 with their 2024 federal income tax return.
Many financial advisors discourage making contributions to nondeductible traditional IRAs because of the record-keeping burdens. If an individual is eligible to contribute to a Roth IRA, they are advised to do so instead of contributing to a nondeductible traditional IRA. In Chris and Joyce’s situation, since their 2024 MAGI is less than $230,000, each would be eligible to contribute the maximum amount of $7,000 to a Roth IRA.
Understanding the Definition of an “Active-Participant” in a Workplace Retirement Plan
Workplace retirement plans include 401(k), 403(b), 457 retirement plans, Solo 401(k) plans, SEP IRAs and SIMPLE IRAs. Defined benefit plans such as a CSRS annuity, a FERS annuity and a military retirement pay in which an employer contributes to the plan (whether or not the employee contributes to the plan) is considered “employee active participant” in an employer-sponsored plan.
Those individuals who have access to a private company-sponsored qualified retirement plan such as a 401(k), a 403(b), or a 457 retirement plan in which the employer does not contribute to the plan on behalf of the employee (no matching contributions or automatic contributions), and the employee does not contribute to the plan are not considered “active participants” in a workplace retirement plan.
Finally, those federal employees and retirees who intend to make their IRA contributions for tax year 2024 are advised to mention to their IRA custodian that their contributions are for tax year 2024 and not for tax year 2025. Otherwise, because it is the year 2025 the IRA custodian may assume that the IRA contributions are in fact for tax year 2025.
Edward A. Zurndorfer is a CERTIFIED FINANCIAL PLANNER™ professional, Chartered Life Underwriter, Chartered Financial Consultant, Chartered Federal Employee Benefits Consultant, Certified Employees Benefits Specialist and IRS Enrolled Agent in Silver Spring, MD. Tax planning, Federal employee benefits, retirement and insurance consulting services offered through EZ Accounting and Financial Services, and EZ Federal Benefits Seminars, located at 833 Bromley Street - Suite A, Silver Spring, MD 20902-3019 and telephone number 301-681-1652. Raymond James is not affiliated with and does not endorse the opinions or services of Edward A. Zurndorfer or EZ Accounting and Financial Services. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors of RJFS, we are not qualified to render advice on tax or legal matters. You should discuss tax or legal matters with the appropriate professional.
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Ed Zurndorfer, EA, ATA, CFP®, CLU®, ChFC®, CEBS®, ChFEBC℠: Federal Employee Benefits Expert
A former career Federal employee, Ed has published a staggering 1,200+ separate articles on Federal Benefits and Retirement!
Just “Google” his name, and you are likely to find a plethora of sites that contain his writings. Drawn to its mission to reach, teach
and serve Feds, Serving Those Who Serve is the only financial planning practice with which Ed has chosen to affiliate in over
20 years teaching. In addition to conducting Federal Benefits seminars for Serving Those Who Serve, you can find Ed’s
writings here on our blog in the FedZone, and on Fed-Soup, MyFederalRetirement, FederalNews Radio and NITP.
He is a member of the Maryland Society of Accountants, the National Association of Enrolled Agents, the International Society of Certified Employee Benefits Specialists, the Financial Planning Association, the National Association of Health Underwriters,
and the Society of Financial Service Professionals. Since 1999, Ed has taught many thousands of Federal employees about
their benefits, in person and at Federal agencies all over the country. Ed is a true national treasure.
Edward A. Zurndorfer is a CERTIFIED FINANCIAL PLANNER™ professional, Chartered Life Underwriter, Chartered Financial Consultant, Chartered Federal Employee Benefits Consultant, Certified Employees Benefits Specialist and IRS Enrolled Agent in Silver Spring, MD. Tax planning, Federal employee benefits, retirement and insurance consulting services offered through EZ Accounting and Financial Services, and EZ Federal Benefits Seminars, located at 833 Bromley Street - Suite A, Silver Spring, MD 20902-3019 and telephone number 301-681-1652. Raymond James is not affiliated with and does not endorse the opinions or services of Edward A. Zurndorfer or EZ Accounting and Financial Services. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors of RJFS, we are not qualified to render advice on tax or legal matters. You should discuss tax or legal matters with the appropriate professional.