Spouse IRA with no job

[jamesbond007]

So I have a clarification questions about Spouse's IRA. She is a full time mom. So no paycheck. We file a joint return so I guess she could piggyback on my salary to calculate her deductible contribution limits? Either way, the max is $5500. So my question is, will her tIRA contribution be deductible or a non-deductible? If it is non-deductible then I will do a backdoor Roth on her tIRA as well. If it is deductible, can I claim the deduction and convert it to roth IRA? Also, by when should I do this to be able to reflect it on my 2016 tax return? My guess is April 18th this year, but just wanted to confirm.

[dandarc]

Since you're doing a backdoor Roth for yourself, you must have a retirement plan at work.  She doesn't.  So the limit to deduct her IRA contribution is 184K (phase out range to 194K) of MAGI.

https://www.irs.gov/retirement-plans/plan-participant-employee/2016-ira-contribution-and-deduction-limits-effect-of-modified-agi-on-deductible-contributions-if-you-are-not-covered-by-a-retirement-plan-at-work

Your MAGI limit for your own is 98K, phasing out at 118K - because you are covered by a retirement plan at work.

Edit - figures above are for 2016 IRAs.

[dandarc]

If it is deductible, can I claim the deduction and convert it to roth IRA? Also, by when should I do this to be able to reflect it on my 2016 tax return? My guess is April 18th this year, but just wanted to confirm.

Yes you can do that, but remember that you'll pay tax on the roth conversion.  So this would only make sense at all if done in different tax years.  Tax filing deadline for IRAs.  I think it is April 17th due to the 15th falling on a weekend this year.

[dandarc]

You were right - the 18th.  Emancipation Day pushes it back to Tuesday.

[jamesbond007]

Yes you can do that, but remember that you'll pay tax on the roth conversion.  So this would only make sense at all if done in different tax years. 

Different years? Wouldn't I pay more tax because more gains in tIRA? Or is this a special case. Right now, I plan to let my wife a tIRA wiht Vanguard and contribute $5500 to it. Then, a week later, convert it to roth. Wouldn't that work?

[jamesbond007]

Since you're doing a backdoor Roth for yourself, you must have a retirement plan at work.  She doesn't.  So the limit to deduct her IRA contribution is 184K (phase out range to 194K) of MAGI.

https://www.irs.gov/retirement-plans/plan-participant-employee/2016-ira-contribution-and-deduction-limits-effect-of-modified-agi-on-deductible-contributions-if-you-are-not-covered-by-a-retirement-plan-at-work

Your MAGI limit for your own is 98K, phasing out at 118K - because you are covered by a retirement plan at work.

Edit - figures above are for 2016 IRAs.

Thanks for the link. That is solid.

[dandarc]

Yes you can do that, but remember that you'll pay tax on the roth conversion.  So this would only make sense at all if done in different tax years. 

Different years? Wouldn't I pay more tax because more gains in tIRA? Or is this a special case. Right now, I plan to let my wife a tIRA wiht Vanguard and contribute $5500 to it. Then, a week later, convert it to roth. Wouldn't that work?

If you're wanting this to end up in a Roth for the same tax year, just put it there in the first place.  What you're saying is "I want to deduct the $5500" - ok, that saves you $1375 (assuming 25% tax bracket).  "I want to convert $5500 in the same tax year" - ok, with no growth or loss, that costs you $1375 (same 25% tax bracket).  The deduction and the conversion offset if you do this within the same tax year, aside from the effects of gains or losses.

What many people on this forum generally do is go traditional if they can, then in retirement convert to Roth slowly, expecting a lower tax bracket on withdrawal due to being able to control your income much better once that pesky job goes away.  So if you're expecting 2017 income to be significantly lower than 2016 income, then you may come out ahead with the contribute and convert move rather than just going Roth in the first place, by the same logic.

[jamesbond007]

Yes you can do that, but remember that you'll pay tax on the roth conversion.  So this would only make sense at all if done in different tax years. 

Ok. Makes sense. My income in 2017 would be higher than in 2016 and my wife's situation won't change. Thanks for adding the additional detail. I will just leave it in a tIRA without converting anything in my wife's account.

Different years? Wouldn't I pay more tax because more gains in tIRA? Or is this a special case. Right now, I plan to let my wife a tIRA wiht Vanguard and contribute $5500 to it. Then, a week later, convert it to roth. Wouldn't that work?

If you're wanting this to end up in a Roth for the same tax year, just put it there in the first place.  What you're saying is "I want to deduct the $5500" - ok, that saves you $1375 (assuming 25% tax bracket).  "I want to convert $5500 in the same tax year" - ok, with no growth or loss, that costs you $1375 (same 25% tax bracket).  The deduction and the conversion offset if you do this within the same tax year, aside from the effects of gains or losses.

What many people on this forum generally do is go traditional if they can, then in retirement convert to Roth slowly, expecting a lower tax bracket on withdrawal due to being able to control your income much better once that pesky job goes away.  So if you're expecting 2017 income to be significantly lower than 2016 income, then you may come out ahead with the contribute and convert move rather than just going Roth in the first place, by the same logic.