Personal Finance Essentials
IRA and Retirement Accounts for Married Couples
A Forgotten Beneficiary Form Cost One Man’s Widow Everything
Don’t Let That Be Your Story
The Spousal IRA
One of the most valuable and underused provisions in the tax code for married couples is the spousal IRA. If you file a joint tax return, both you and your spouse can each make IRA contributions – even if only one of you has earned income. The total combined contributions cannot exceed your combined taxable compensation, but this provision ensures that a stay-at-home spouse continues to build retirement savings in their own name.
Roth IRA Eligibility for Married Couples
Eligibility to contribute to a Roth IRA depends on your filing status and modified adjusted gross income. Married couples filing jointly can contribute to a Roth IRA up to the income limits set by the IRS. Married couples filing separately who lived together face much tighter limits. Understanding which accounts each of you can contribute to – and in what amounts – is an important part of coordinating your retirement strategy.
Managing Multiple Retirement Accounts
By the time a married couple retires, the two of them may have accumulated 20 or more retirement accounts – 401(k)s, IRAs and others from different employers over the years. Consolidating these into a smaller number of accounts dramatically reduces administrative complexity and makes it easier to stay compliant with IRS rules. For most couples, consolidating into one IRA per spouse is a practical and effective approach.
Beneficiary Designations
Each retirement and IRA account requires you to name a beneficiary – the person who receives the account when you die. It is common to name a spouse as the primary beneficiary and children as secondary beneficiaries. But this designation must be reviewed regularly, particularly after major life events: births, deaths, divorces and remarriages.
The consequences of neglecting this are significant. A man who named his first wife as beneficiary on his retirement account, divorced, remarried and had a child – but never updated his forms – left his entire retirement account to his first wife upon his death. His widow and their daughter received nothing. The lesson is clear: review your beneficiary designations regularly and update them whenever your family circumstances change.
Inheriting a Retirement Account as a Surviving Spouse
If your spouse passes away and you are named as the beneficiary of a retirement account, you have four options: take the money as a distribution and pay taxes immediately; roll it into your own IRA; establish a Beneficiary IRA in your name; or roll it into your IRA and convert it to a Roth IRA. Rolling the assets into your own IRA is generally the most flexible choice – unless you are under age 59½ and need access to the funds, in which case a Beneficiary IRA avoids the 10% early withdrawal penalty.
Dividing Retirement Assets in Divorce
If retirement assets must be divided as part of a divorce, a Qualified Domestic Relations Order (QDRO) is required. This legal document gives an “alternate payee” – a spouse, former spouse, child or dependent – the right to receive a portion of the retirement benefits that would otherwise belong to the account holder. Both parties can avoid immediate taxes by having the QDRO specify an amount to be rolled directly into the alternate payee’s IRA.