Learn the advantages of making 2023 IRA contributions before the April deadline.

Although the December 31,2023 year-end deadline has passed for almost all IRS tax breaks, there is still one tax break that may be available to some federal employees that could reduce their 2023 federal and state income tax liabilities. This tax break is a spousal traditional IRS contribution and is often overlooked by many tax filers. It can benefit married couples when one spouse earns less salary (or no salary) than the other spouse earns.Eligible married couples can use a spousal traditional IRA contribution to double their contributions to traditional IRAs and deduct (as an adjustment to income) on their 2023 federal income tax returns as much as $15,000 if both spouses are over age 49 as of December 31, 2023. They can deduct a maximum of $13,000 if both spouses are younger than age 50 as of December 31, 2023. To do so, they must make their traditional 2023 IRA contributions no later than April 15, 2024 (federal individual income tax filing deadline), even if they request a six-month extension to file their 2023 federal income taxes.

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Spousal IRAs (which started in the 1970’s) have been useful particularly for married couples when one spouse temporarily leaves the workforce to care for children or an elderly parent. 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 the contribution to a Roth IRA is made with after-taxed dollars, the Roth IRA accrues earnings within the IRA. Provided certain requirements are met, withdrawals from a Roth IRA are completely tax-free. The Roth IRA contributions can actually be withdrawn tax-free at any time.

Spousal contributions to traditional IRAs may be deductible as an “adjustment to income,” reducing adjusted gross income (AGI) and therefore reduce taxable income. Reduced taxable income results in reduced federal and state tax savings. Reduced AGI can result in other tax savings via tax deductions and tax credits. Many federal tax credits and tax deductions are lost if an individual’s AGI is too large. For example, the federal educational tax credits (the American Opportunity Credit and the Lifetime Learning Credit) the Student Loan Interest Loan Deduction) will not be available if an individual’s or married couple’s AGI is too large.

For some married couples, a tax-deductible spousal contribution to a traditional IRA thereby lowering AGI to the extent that any qualified dividends and long-term capital gains received during the year qualify for a 0 percent “preferential” federal income tax rate. A married couple in which at least one spouse is enrolled in Medicare Part B (Medical Insurance) could end up in a lower Medicare Part B “income-tier” when a tax-deductible traditional IRA contribution is made, thereby lowering AGI.

The downside to making deductible traditional IRA contributions is that the rules for making these contributions are confusing. The following are the IRS rules with respect to making deductible traditional IRA contributions for tax year 2023.

Basic Rules with Respect to Making Spousal IRA Contributions for Tax Year 2023

The basic rules for making spousal 2023 IRA contributions are the same as for making other type of other IRA contributions.. For example, spousal IRA contributions go into the spouse’s individual owned IRA account.
At least one spouse must have earned income during the year for which the IRA contribution is made. Earned income is salary/wages or self-employment net profit income. Note that income from investments (interest, dividend and capital gain income), Social Security and pensions do not count as earned income.
The 2023 spousal IRA contribution is limited to $6,500 for spousal IRA owners younger than age 50 as of December 31,2023 and $7,500 for spousal IRA owners over age 49 as of December 31, 2023.
The amount of a spousal IRA contribution for 2023 is limited to the lower of $6,500 (if the spouse is younger than 50) or $7,500 (if the spouse is at least age 50) and the amount of either spouse’s earned income.

The following example illustrates:

Example 1. Stan and Dina are married, and both are age 63. Stan is a federal employee and earned $110,000 during 2023. Dina is retired and earns $5,000 from consulting. The couple can contribute $7,500 to a traditional IRA for Stan and $7,500 to a traditional IRA for Dina.

Income Limitations for 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 IRA contributions.

With respect to married couples, the first question that needs to be asked when determining whether each spouse’s traditional IRA contribution is deductible 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) retirement plan, the Thrift Savings Plan, or a defined benefit plan such as the CSRS or FERS retirement plans.

If neither spouse actively participates in a workplace retirement plan, then there are no MAGI limits for deducting each spouse’s contribution to a traditional IRA. The deductibility of a spousal traditional IRA contribution ends at $228,000 of MAGI for 2023 for a spouse who does not participate in a workplan retirement plan and is married to someone who does participate in a workplace retirement plan. If both spouses actively participate in a retirement plan, then both spouses are subject to the “phase-out” of deductible traditional IRA contributions, ending at $136,000 of MAGI during 2023. The following two examples illustrate the deductibility and nondeductability of traditional IRA contributions for 2023:

Example 2. Herbert and Cecelia are a married couple. Herbert is age 66 and retired from federal service. Cecelia is aged 64 and works part-time as an office clerk. Her employer does not offer any retirement plan for employees to participate in. During 2023, Cecelia’s gross salary was $55,000. Both Cecelia and Herbert are eligible to contribute to an IRA for 2023, a maximum contribution for each of $7,500. This is because Cecelia has earned income allowing Herbert to contribute to an IRA. Their MAGI for 2023 is $175,000. Herbert and Cecelia are each eligible to contribute $7,500 to a deductible traditional IRA because neither Herbert nor Cecelia is an active participant in a retirement plan.

Note that even though Herbet is receiving a FERS annuity and making TSP withdrawals, he is retired and therefore not an “active participant” in a retirement plan. In particular, he cannot contribute to either retirement plan.

Example 3. Joyce and Stuart are married, and both are federal employees. Joyce is 38 and Stuart is 40. During 2023, their MAGI was $188,500. Both Joyce and Stuart are actively participating in a retirement plan. They are FERS-covered employees, and each contributes to the TSP. Since their MAGI exceeds $136,000, neither Joyce nor Stuart is eligible to contribute to a deductible traditional IRA for the year 2023.

Note that Joyce and Stuart are eligible to contribute to a “nondeductible” traditional IRA up to the annual contribution limit. There are no MAGI limits for contributing to a “nondeductible” traditional IRA. Many financial advisors discourage making contributions to nondeductible traditional IRAs because of record-keeping burdens.

Understanding the Definition of an “Active Participant” in a Workplan Retirement Plan

Workplace retirement plans include 401(k), 403(b), 457 plans, Solo 401(k) plans, SEP IRAs and SIMPLE IRAs. Defined benefit plans in which an employer contributes to the plan (whether or not an employee contributes) is considered an “active participant” workplace retirement plan.

Those individuals who have access to a qualified retirement plan, such as a 401(k), 403(b) or 457 plan in which the employer makes no automatic contributions and an employee does not contribute to during a particular year, then the employee is not considered an “active participant” in the qualified retirement plan during that year.

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.