Hooray for the IRA!—Part 2

IRAs for spouses with no or low income

Spouses of either gender who work at raising children, taking care of elderly family members or just keeping the home fires burning dislike being referred to as non-working spouses. Of course, they work; they just don't receive wages for it.

But these spouses look forward to a comfortable retirement, too. And to help them, Congress permits an individual with earnings to contribute to a “spousal IRA” on behalf of a non- or low-earning spouse.

A spousal IRA can be either a traditional or Roth IRA, and the same rules apply.

That is, a spousal traditional IRA offers tax-deferred earnings and, possibly, tax- deductible contributions. A spousal Roth IRA offers growth of earnings and, possibly, tax-free withdrawals of earnings if certain conditions are met.

The following Q&A provides more spousal IRA details:

Q.  Who is eligible for a spousal IRA?

A.  As long as you and your spouse meet the requirements of the specific type of IRA you choose, you can establish a spousal IRA.

Q.  Why invest in a spousal IRA?

A.  The main reason is to give the low- or non-earning spouse a tax-advantaged plan in which to save for retirement. The specific tax benefits, of course, depend on the type of IRA you choose.

Q.  How much can you contribute each year?

A.  You can contribute up to $5,500 in your spouse’s name in 2009. Also, if your spouse is age 50 or older, you may be eligible to contribute another $1,000 in 2009. If the spousal IRA is traditional, you can make contributions as long as you have earned income and until the spouse reaches 70½. If the spousal IRA is a Roth, you can contribute to the spousal Roth IRA as long as you have earned income.

      If your contributions are invested in mutual fund or variable annuity investment options, keep in mind that the value of your investment will fluctuate so that your account, when withdrawn, could be worth more or less than the original value.

Q.  Are spousal IRA contributions deductible?

A.  Yes, if you and your spouse qualify for a full or partial deductible traditional IRA. No, if either of you do not qualify for a deductible traditional IRA or if the spousal IRA is a Roth.

Q.  What happens when money is withdrawn?

A.  With a spousal traditional IRA, income taxes are payable on withdrawal. Remember that a 10% federal tax penalty might apply to withdrawals before your spouse turns 59 ½.

      With a spousal Roth IRA, qualifying withdrawals of earnings are generally tax-free if you’ve had the account for at least five years and one of the following conditions applies:

• Your spouse reaches age 59 ½
• Your spouse becomes disabled
• The money is for a first-time home purchase
• The death of your spouse

Q. How long can you leave money in a spousal IRA?

A.   Spousal traditional IRA:  Required minimum distributions must begin when your spouse turns 70 ½.

      Spousal Roth IRA:  Your spouse doesn’t have to begin making withdrawals at a specific age. There is no required minimum distribution rule for Roth IRAs during your spouse’s lifetime.

In the last section, we discuss rolling funds over to an IRA.

Getting it all together—rolling assets into an IRA

Life is complicated enough. So why not try to simplify your financial life? One way to do that is to reduce the number of retirement investment accounts you have with other employers or other financial service providers by rolling various accounts over to an IRA.

When you roll over other types of tax-qualified accounts directly to a traditional IRA, the transferred funds will retain their tax-deferred status. But you must make certain the transferred funds are sent to the rollover IRA in a direct rollover by the previous provider and not to yourself. Otherwise, there could be a 20% withholding on the distribution, plus a 10% tax penalty on the amount not rolled over if you’re under age 59 ½.

A traditional IRA can be rolled into a Roth IRA, but again, income taxes are payable on the taxable portion of the rollover amount.

Q. Who should consider a rollover IRA?

A.  You or your spouse can if you currently have an IRA or other tax-advantaged plan. Tax-advantaged plans include IRAs and workplace 401(a), 401(k), 403(b) or governmental 457(b) retirement plans.

Q.  What are the potential advantages of a rollover IRA?

A.  Rollover IRAs represent important potential benefits such as:

1. Simplifying your financial life
2. Retaining the benefits of tax-advantaged growth
3. Possibly gaining access to an expanded and/or more suitable set of investment options
4. Possibly getting access to investments with lower fees and/or more consistent performance
5. An opportunity to transfer money to a more stable provider
6. Benefiting from a specific provider’s reputation for personal service and guidance
7. Making it easier to determine if an investment plan is still on track
8. Making it easier to determine the level of investment risk
9. Having more control over investments
10. Seeking more flexible withdrawal terms

Q. When is a good time to roll assets over to an IRA?

A.  Though you can generally roll funds over to an IRA at any time, and there is no limit to the amount you can roll over, certain life events seem to lend themselves more readily to this opportunity. Examples:

• You leave your current employer
• You get a new job with a new employer
• You receive a payout or lump-sum distribution from a former employer
• You retire
• You are confused by all the paperwork you receive each quarter (or more often) from all your investment accounts
• You are faced with a distribution event from your tax-qualified non-IRA account.
• Your spouse dies, and you must take a payout or lump-sum distribution from your deceased spouse’s account
• Your spouse must take a payout or lump-sum distribution from your account upon your death

Q.  What can’t be rolled over into an IRA?

A.  Distributions not eligible for rollover include required minimum distributions, payments based on life expectancy, payments for a period of 10 years or more, loan proceeds, or hardship or unforeseeable emergency withdrawals.

To find out more about spousal or other IRAs, contact Andrew Brake at 336-833-3066 or andrew.brake@valic.com.  

This information is general in nature and may be subject to change. Neither VALIC nor its financial advisors or other representatives give legal or tax advice. Applicable laws and regulations are complex and subject to change. Any tax statements in this material are not intended to suggest the avoidance of U.S. federal, state or local tax penalties. For legal or tax advice concerning your situation, consult your attorney or professional tax advisor.

Securities and investment advisory services are offered by VALIC Financial Advisors, Inc., member FINRA and an SEC-registered investment advisor.

VALIC represents The Variable Annuity Life Insurance Company and its subsidiaries, VALIC Financial Advisors, Inc. and VALIC Retirement Services Company.

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