Obstacles with IRA Contributions and RMDs: This weeks Q&A

This week’s Slott Report Mailbag looks into spousal contributions, IRAs, the IRS guidelines, and RMDs. As always, we recommend you work with a competent, educated financial advisor to keep your retirement nest egg safe and secure. You can find one in your area here.

Question:

I read your excellent post of December 07, 2015 titled “How a Stay-At-Home Spouse Can Make IRA Contributions” (https://irahelp.com/slottreport/how-stay-home-spouse-can-make-ira-contributions).

I was particularly taken by the section headed “Other Rules” where you mention IRS reporting rules (or lack thereof).  I have had a devil of a time finding any specific IRS guidance on how spousal contributions are handled.  For instance, I can’t find anything from the IRS about whether a spouse (wife) can contribute to an existing IRA of the non-working (no compensation) other spouse (husband) if the husband’s already existing IRA was established by the husband while he was working.

Can you point me to IRS guidance or rules that cover how to handle such a situation? 

All I can find in IRS Publication 590-A “Contributions to Individual Retirement Arrangements” 2016 page 41 is the undetailed, general statement: “Can you contribute to a Roth IRA for your spouse? You can contribute to a Roth IRA for your spouse provided the contributions satisfy the Kay Bailey Hutchison Spousal IRA limit discussed in chapter 1 under How Much Can Be Contributed?, you file jointly, and your modified AGI is less than $194,000.”

As you can see, the IRS statement provides little guidance on how such a contribution is actually handled, documented, accounted for, or tracked.  If money suddenly appears in the husband’s existing IRA how does that get recognized as a spousal contribution?

Any reference to IRS rules or guidance that you can provide would be greatly appreciated.

Thank you. – Chris

Answer:

The rules for spousal IRA contributions are relatively straightforward, they match the rules for individuals making their own contributions with the exception that the spouse does not meet the requirement for earned income. You can find information in IRC 219 and Ann. 77-84.

The I in IRA stands for individual. The spousal contribution must go into the non-working spouse’s own IRA or Roth IRA. The spousal contribution can go into either a new or an existing IRA; it does not have to be a separate IRA. There are no joint IRAs.

The IRS does not track where IRA contributions come from, only whether or not the individual is eligible for a contribution. Spousal contributions are treated no differently than an individual’s contribution. A Form 5498 will be issued in May showing any contributions for the previous year and the year-end balance of the IRA.

Question:

I retired in August 2016. I have elected to take a lump sum from my company pension. The company process has taken too long to distribute my lump sum. The distribution is going to be in February of 2017. Will I be required to take RMD for 2017 or should the company take RMD out before distributing lump sum to be direct rolled over to my existing rollover IRA account in the February year 2017.

Thanks. – BPP

Answer:

You do not give your age so we cannot address your specific situation. Here are the rules.

A plan participant must begin taking distributions from an employer plan beginning in the year he turns age 70 ½.

There is an exception for those who are still working if the plan includes a still working exception to the RMD rules. For those plan participants, the first RMD is due for the year they separate from service, even if their last day of work is on 12/31 of the year.

All distributions from a plan are considered to be rollovers and an RMD cannot be rolled over. The employer plan should distribute any RMDs that are due before rolling over any plan funds to another tax-deferred retirement account. If the RMD is not paid out but is instead rolled over to the new account, the plan participant now has an excess contribution (the RMD amount) in the new account. It must be corrected by telling the institution that you are taking a distribution of an excess contribution. A net income calculation must be done and a net amount is then distributed from the account to correct the error.

Many pension plans will not do an RMD calculation before making the lump sum distribution and will not provide the plan participant with a prior year-end balance so that they can do the calculation. It is ok to base the calculation for the RMD on the amount distributed to the plan participant.