Spousal Roth IRA Explained

what's going on guys welcome back to the channel in this video i'm gonna talk about spousal roth iras how you can get money into your spouse's roth ira even if they don't have earned income themselves you can actually use the earned income from your own job so let's go over these spousal roth iras kind of how they work what you need to know and how you can make sure that you don't end up with a surprise tax bill so the first thing that we want to talk about is the fact that it is a separate account it is just like a regular roth ira in fact there is no difference in the titling of the roth ira it's actually a spousal contribution it's not an actual spousal ira or roth ira you can even use the same roth ira or even if you're doing traditional the same account that you might already have from years before so you can even make those contributions so the first thing that you need to know about the spousal roth iras is that it is just a regular roth ira account so just opening up the account in your spouse's name not your own your spouse's name and that's it there's no special thing that you need to do no special requirement this is not a separate type of account it is just an account in your spouse's name so that's number one number two is that it has to be earned income now the earned income is going to come from the spouse that's earning the income so that has to be there in order to make this contribution so as long as the math works that you have enough earned income so for example and it's probably not a greatest example let's say that you only earn 6 000 for the year and you put it into your own ira well then there's no money left over so you can't put it into your spouse's roth ira as well but if you had 12 000 in income then you could do six thousand and six thousand so that's just something to remember or to think about so the roth ira has to be earned income so now we have it has a separate account it is earned income and it's up to six thousand dollars and if you're 50 or older you can do an additional one thousand dollars which is the catch-up contribution but there is a phase out for this now it is for married filing jointly only yeah that's right if you're doing filing separately this is something you can't do unfortunately just one of those things that you have to file as jointly so married filing jointly 6050 or over additional 1000 and the phase out on this is from 198 to 208 000. now i'm not going to go into a phase-out calculation in this video because i have done a video on phase out so go ahead and watch that but at 198 000 you can do the full amount for yourself and your spouse so if your spouse wants to contribute or you want to contribute into the roth ira 198 or less in adjusted gross income or modified adjusted gross income in this case then it's up to six thousand dollars and it starts to phase out so at 208 000 unfortunately you can't contribute directly into the roth ira but key word there directly there's still a strategy here to make that spousal contribution if you're over that threshold and that is making a non-deductible contribution so if you earn over 208 000 you can't contribute directly into the roth ira so here's how that works we're going to do an illustration so let's say that you have a roth ira here and a traditional ira here now if your traditional ira has no money in it and you make the contribution as a non-deductible contribution into your traditional ira so let's say that's six thousand dollars then you can convert it over to a roth ira through a roth conversion so this is called the backdoor roth ira where you're making the non-deductible contribution into the traditional ira and then you're immediately transferring it over to the roth ira now here's where this gets a little hairy so let's say that you have existing dollars inside of your traditional ira now i'm i'm doing this as two separate buckets but really it's gonna be one account but let's say that you already have and we'll call this the traditional ira non-deductible contributions and let's say that you also have 6000 from last year that's already still in the traditional ira and whatever it didn't grow or whatever and you want to convert just this non-deductible portion over to the roth side well you have to understand that there's something called the pro rata rule so that's the problem rada pro rotter rule so what this means is that we need to take an equal amount from the deductible and the non-deductible so you can't just pick and choose our cherry pick just this 6 000 and roll it over so what you're going to have to do is in this case it's a pro rata amount so it happens to be the same amount so for every one dollar that you want to convert you're going to have to take 50 cents from this top section and then 50 cents from this bottom section because that would be an equal amount now let's say that there was 18 thousand up here and there was six thousand down here that means one fourth would have to come from this side and the other three quarters would come from this eighteen thousand that is the pro rata rule so it has to be the same ratio is really what i'm trying to make sure that you understand it's the same ratio of these two types and that is going to create a taxable event so this 50 cents over here then gets added to your income now there are other strategies that you can use for example you could take though that traditional ira and roll it into a current workplace plan but the whole reason you're doing the spousal contribution is because your spouse doesn't have earned income so they don't have an existing plan to roll that traditional ira money out while you're making that non-deductible contribution so that is just something to consider or keep in mind that if you earn or earning your modified adjusted gross income is over 208 000 you're making the spousal contribution and you're doing it as a non-deductible to convert then you have to be aware that if you have an existing if your spouse has an existing traditional ira you have to be aware that there is the pro-rata rule now making that non-deductible contribution is also kind of an accounting nightmare so you don't want to leave the non-deductible contributions in your traditional ira and just say you know what i'm just going to leave it in there because you might have some issues later on down the road if you're not keeping track of that that difference in those two accounts now you could open up two separate traditional iras just for your own accounting purposes but it starts to make it even more complicated so not something that you really want to do if you have a traditional ira you want to look into other alternatives to get that money out of there before you make the non-deductible contribution so it gets a little more complicated if you have questions on that i could do future videos to go a little bit more in depth or just to answer your questions and that is the spousal roth ira and if you've enjoyed this video be sure to subscribe and leave your comments down at the bottom

Channel: Travis Sickle

Views: 6,645

Keywords: travis sickle, roth ira, roth ira explained, roth ira investing, spousal roth ira, roth ira investment options, roth ira vs traditional ira, what is a roth ira and how does it work, spousal iras, what is a roth, roth ira explained video

Id: tksyxBsewQA

Length: 7min 46sec (466 seconds)

Published: Fri Oct 29 2021