Spousal IRA Contributions and Divorce: What You Need to Know

Friday, February 27, 2015

By Beverly DeVeny, IRA Technical Expert
Follow Me on Twitter: @BevIRAEdSlott

In a marriage where one spouse (Annie) has earned income and the other spouse (Bernie) has little or no income, an IRA or Roth IRA contribution can be made for Bernie based on Annie’s income. Bernie’s spousal contribution will be based on the lesser of the annual contribution limit OR the combined income of Annie and Bernie minus any IRA or Roth IRA contributions made to Annie’s accounts. All other contribution eligibility rules must also be met.

Since there are no joint IRAs, Bernie’s spousal contributions must be made to Bernie’s own IRA. They do not have to be made to a separate spousal IRA. Bernie could work one year and make his own contributions to the IRA and not work the next and make his spousal contribution to the same IRA.

But what happens if Bernie makes his contribution early in the year, and later in the year he and Annie are divorced or separated? Bernie’s contribution becomes invalid. It is an excess contribution for the year – unless Bernie gets a job and has his own compensation to justify the contribution.

Two of the rules for spousal IRA contributions are that the spouses must file a joint tax return for the year and they must be legally married on December 31 of the year for which the contribution was made. If Bernie and Annie are divorced by year end, they cannot file a joint tax return even if they wanted to do so.

Bernie’s excess contribution must be removed – as an excess contribution. He must tell the IRA custodian exactly what he is doing. He must timely remove the amount of the excess contribution, including any gains or losses on that amount. The amount of the contribution will not be taxable, but any earnings must be included in his income. He will be subject to the 10% early distribution penalty on the amount of the earnings if he is under age 59 ½ and no exceptions to the penalty apply.

But for Bernie there is an upside. He gets to keep the amount of the contribution and Annie has to pay the income tax on it.

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