Tax-advantaged savings for non-working spouse

[bothpaninis]

Probably a relatively common question on here, so feel free to just link me to a discussion if that's appropriate.

My husband recently quit to stay home with the kids. He used to (almost) max out his 401(k), but when he quit, he rolled his 401(k) into an IRA with Vanguard. We would like to save as much as we can in pre-tax accounts this year. I'm thinking I'll max out my 401(k), then put the max ($6000, is it?) into his Vanguard IRA as a spousal contribution. The only thing I'm not sure of is, how do I get the tax deduction? If I set up a payroll deduction, they'll put post-tax money in it. Do I just set it up that way and then get those taxes back at the end of the year when I file? How do other people deal with this question? Are there any other tax considerations I should be aware of?

Thanks for your help!

[johnny847]

The max is $5500 unless he is at least 50, then it's $6500.

IRA deductions are never done through payroll. There is zero employer involvement in an IRA. You simply make your contribution and then claim the contribution as a deduction when you file your taxes.

You may want to lower your tax withholding from your job to compensate for this reduction in taxes.


Any reason you're not planning on contributing to an IRA for yourself? Also, do you have a HSA (health savings account)? It requires a high deductible health plan (HDHP) though.

[terran]

As long as your Modified AGI (mostly your gross income, with some exceptions) is less than $184k you're good to go on contributing to a deductible traditional IRA for your husband. See 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

If your MAGI is less than $98k you can also contribute to a deductible traditional IRA. See 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-Covered-by-a-Retirement-Plan-at-Work

If your MAGI is over $98k but less than $184k you can contribute to a roth. See https://www.irs.gov/Retirement-Plans/Plan-Participant,-Employee/Amount-of-Roth-IRA-Contributions-That-You-Can-Make-for-2016

If your MAGI is over $184k you can look into a "backdoor" roth for both you and your husband, although your husbands rollover IRA could be problematic.

As Johnny said, you won't get an immediate reduction is your withholding by contributing to an IRA, but your tax liability will be lower for this year, so you'll get a larger refund, or have to pay less depending on whether you owe taxes.

Whether or not you contribute to an IRA you should take a look at your withholding because your income will be very different this year. As long as you pay 90% of your tax liability for 2016 or 100% (110% if your AGI is over $150k) of your tax liability for 2015, whichever is less, then you won't owe an underpayment penalty.

[bothpaninis]

Johnny847  -

Thanks for the clarification. He's under 50, so I guess we'll contribute $5500.Also, we do have an HSA. I think we are maxing that out. I forget what the max contribution is for 2016, but I believe that max is for all sources (employer and employee contributions), so I have to figure out how much my employer contributes each month first before determining our contributions.

terran -

MAGI is about $130K, so I guess that means I can contribute to my own roth after maxing out the 401Kl, but not my own IRA. Is that right?

[dandarc]

Do your own IRA - I'd probably go Roth initially given your numbers.  Then when you do your 2016 income taxes next year, determine if a deductible tIRA contribution is available, and how much if you're in the phase-out-range. 

If there is any amount that you can deduct, recharacterize that to traditional - it is a 10 minute phone call if your accounts are with Vanguard (at least today it was for me).

[terran]

MAGI is about $130K, so I guess that means I can contribute to my own roth after maxing out the 401Kl, but not my own IRA. Is that right?

Yep, sounds right. Roth for you, and traditional for your husband. Did your husband stop working in 2015, or sometime this year? I'm not sure what effect having a work retirement plan for part of the year would have on IRA deductibility, so if he worked for any of 2016 you'd have to look in to that.

One note: I said MAGI was pretty much gross income, but I think it would be more accurate to say it's pretty much box 1 of your W2 (subtract 401k, health insurance, etc from gross). It would be worth a google to confirm though what all is included/excluded though.

Is $130k while your husband was working, or what it will be at this year?

[ender]

The only thing I'm not sure of is, how do I get the tax deduction? If I set up a payroll deduction, they'll put post-tax money in it. Do I just set it up that way and then get those taxes back at the end of the year when I file? How do other people deal with this question? Are there any other tax considerations I should be aware of?

Some clarification that might be helpful.

Your employer withholds taxes from your paychecks based on your W-4 form that you gave them at some point. This form lets you tell them how many exemptions you have through a small worksheet (states are sometimes calculated differently) and then that allows them to withhold their estimated taxes.

A 401(k) can then be combined with that information to help them estimate your yearly taxes and withhold this from your paycheck. However, tax withholding is an estimate of your actual taxes owed - not actual taxes. When you file taxes, you may get more or owe, depending on how your W-4 was setup.

If you plan on deducting an IRA from 2016, you can actually adjust your W-4 withholding to give your employer the ability to better estimate withholding.

When you create an IRA separate from your company, you tell your provider whether it's a traditional IRA or Roth IRA.