Other Types of IRAs (Spousal | Stretch | Custodial)

What is a Spousal IRA?

Spousal individual retirement account (IRA) rules may permit a married individual to contribute to his or own IRA even if he or she had little or no direct earnings.

In general, an individual's IRA contribution cannot exceed his or her earned income during a given year. Because of this rule, individuals who don't work -- or who earn less than the maximum allowed annual IRA contribution -- might be limited as to the amount they can put toward retirement. But when spouses file jointly, both partners may make the maximum allowed IRA contributions if their combined earned income is sufficient to cover both contributions.

The maximum an individual filing a joint return can contribute for 2019 is the smaller of the following:

The ability to contribute to a spousal IRA may potentially benefit couples filing jointly in which one partner is a family caregiver, a student, is unemployed, or is not earning significant income for some other reason.

Let's look at a hypothetical example. Jamie earns $60,000 in 2019 while her spouse, Pat, earns $3,000 as a student. Both are in their 30s. As she is younger than 50 and earned more than the IRA contribution limit, Jamie may contribute $6,000 to her IRA. Because of the spousal IRA provision, Pat may contribute $6,000 to his IRA even though his earned income was less than that amount. How? His total contribution is limited to the lesser of $6,000 or their combined income less Jamie's contribution ($63,000 minus $6,000).

Tax Deductions for Spousal IRAs - A contribution to a traditional spousal IRA may be tax deductible. Whether a couple filing jointly can deduct the contribution made on behalf of the lesser-earning spouse depends on the couple's combined modified adjusted gross income (MAGI) and whether the contributor or the spouse participates in an employer-sponsored retirement plan.

Because rules that apply to spousal IRAs are complicated, you may want to consult a tax professional to make sure you understand them as they apply to your situation.

What Is a Stretch IRA?

A stretch IRA is a traditional IRA that passes from the account owner to a younger beneficiary at the time of the account owner's death. Since the younger beneficiary has a longer life expectancy\nthan the original IRA owner, he or she will be able to "stretch"the life of the IRA by receiving smaller required minimum distributions (RMDs) each year over his or her life span. More money can then remain in the IRA with the potential for continued\ntax-deferred growth.

Creating a stretch IRA has no effect on the account owner's RMDs, which continue to be based on his or her life expectancy. Once the account owner dies, however, beneficiaries begin taking RMDs based on their own life expectancies. Whereas the owner of a stretch IRA must begin receiving RMDs after reaching age 70½, beneficiaries of a stretch IRA begin receiving RMDs after the account owner's death. In either scenario, distributions\nare taxable to the payee at then-current income tax rates.

It's worth noting that beneficiaries also have the right to receive the full value of their inherited IRA assets by the end of the fifth year following the year of the account owner's death. However, by opting to take only the required minimum amount instead, a beneficiary can theoretically stretch the IRA and\ntax-deferred growth throughout his or her lifetime.

If you do not currently have any IRA beneficiaries, employing the stretch technique by naming a beneficiary could, in theory, provide significant long-term benefits.

Added Perspectives - Your enhanced ability to stretch IRA assets is a direct result of an IRS decision to simplify the rules regarding RMDs from IRAs. These rules allow beneficiaries to be named after the account owner's RMDs have begun, and beneficiary designations can be changed after the account owner's death (although no new beneficiaries can be named at that point). Also, the amount of a beneficiary's RMD is based on his or her own life expectancy, even if the original account owner's RMDs had already begun.

If you believe you will be unlikely to deplete your IRA assets during your lifetime, you might consider creating a multigenerational stretch IRA. By doing so, you could potentially build long-term financial security for a loved one while minimizing estate taxes.

Note that the rules presented in this article apply to traditional IRAs bequeathed to a nonspousal beneficiary. Special rules apply to spousal beneficiaries. Consider meeting with a financial advisor to discuss your specific situation.

What Is a Custodial IRA?

A custodial individual retirement account (IRA) is an IRA managed by a parent or guardian for the benefit of a minor child, as long as that child works and has sufficient earned income. Its objective is to give minors, typically teenagers, a head start in investing for retirement. As such, rules governing IRAs typically apply.

A custodial IRA can be either a traditional IRA or a Roth IRA.

The maximum annual contribution for 2019 is $6,000 (indexed annually for inflation).

As long as the money remains invested, any investment earnings may be tax deferred (or potentially tax free for Roth IRAs).

Withdrawals are taxed at ordinary income tax rates and, before the owner (the child) reaches age 59½, may be subject to a 10% additional tax.

Unless certain criteria are met, Roth IRA owners must be 59½ or older and have held the IRA for five tax years before tax-free withdrawals are permitted.

Required minimimum distributions (RMDs) are mandatory after age 70½ for traditional IRAs.

Irrevocable Gift - It's important to understand that assets within a custodial IRA are considered an irrevocable gift and become the property of the child at the age of majority. A parent or guardian cannot reclaim the assets once the account has been established. Since the assets do belong to the child, the parent or guardian has no control over the child's ability to take nonqualified withdrawals once the child reaches the age of majority.

Withdrawals - The objective of an IRA is to save for retirement, but IRS rules may permit penalty-free withdrawals for higher education expenses, a first-time home purchase, and other reasons. If your child has a custodial IRA, theoretically, he or she could make withdrawals to reach these financial goals without paying a 10% additional tax on early withdrawals. The amount of the withdrawal, however, may be subject to ordinary income taxes unless certain qualifications are met. See IRS Publication 590-B for additional information.