IRAs: A Quick Reference Guide Q & A
Q. I have a large TIRA from the rollover of my 401(k) from my former employer. However, my wife’s TIRA is small and is only made up of contributions we have made to it over the last several years when we could afford to contribute to it. May I transfer some of the mutual funds in my large TIRA to her TIRA? I ask because I was told that there are no gift restrictions between spouses.
A. You may not transfer funds from your IRA to your spouse’s IRA… at least while you are alive. The ‘I’ in IRA means “Individual” and it must be owned as an individual. There is no such thing as joint ownership of a retirement plan, including IRAs. But at death, if the surviving spouse is the named beneficiary of your IRA, this spouse beneficiary may elect to transfer the full value of the IRA – excluding any mandatory distributions for the year that have not yet been withdrawn – to their own IRA and mix it together with their own IRA.
It is important to note that IRA rules for designating beneficiaries are different than rules governing employer-sponsored retirement plans. The spouse MUST be designated as a beneficiary in an employer-sponsored plan – unless that spouse signs a waiver allowing another person to be a partial or full beneficiary. However, the owner of an IRA can generally name anyone as the beneficiaries on the IRA beneficiary designation form. This rule varies by state, so the IRA owner must check locally for a definite answer.
Q. I am 68 and retired. Last year, I did some farm work at harvest time for a neighbor who paid me with part of his harvest. I kept a portion of this harvest produce and sold the rest at a road side farmer’s market. Can I somehow use this to make a contribution to my IRA?
A. Yes, but you must report the fair value of the farm products you received as income. Unless farming is your primary source of income, you would likely report this as “other” income on your form 1040.
Q. I’m 68 and retired and my wife is a retired state employee, but this last year, she was asked to do some contract work for her old employer. Since she does not get a W2 for her work, when will we know how much we can contribute to her IRA for the year?
A. Once you get the 1099MISC from the state employer – usually by the end of January of the following year – you will know how much she has received in contract payments for the year. You, or your tax preparer, will then use this for completing her schedule C or schedule C-EZ, where she can deduct any business expenses she had –the IRS requires this step. The net of her self-employment income will be line 31 of the Schedule C or line 3 of Schedule C-EZ. She, or her tax preparer, must then complete a Schedule SE to calculate her FICA (Social Security and Medicare) tax.
Once this is done, she will subtract half of the FICA tax from her net income as shown on Schedule C or C-EZ. This value will be the amount she may contribute to her, your or both TIRA or RIRA, assuming your other sources of income do not put you over the AGI limit for a RIRA contribution. For 2016 and 2017, the maximum contribution, assuming she is at least age 50 or older, is $6,500 each or $13,000 for both of you.
Q. I am 38 years old, single and I started my own self-employed business last year. My tax preparer helped me set up a SEP IRA retirement plan for me to contribute from my self-employment income. But since I’m contributing to the SEP IRA, can I still contribute to my RIRA to which I have been contributing over the past several years when I worked for an employer?
A. Yes, providing your AGI does not exceed the maximum for singles RIRA contributions and assuming you have at least as much in net contributable income as you contribute to your RIRA. Your net contributable income is your net self-employment income from your schedule C minus contributions to your SEP IRA minus half of your FICA tax – the amount you deduct on line 27 of your form 1040.
Q. Neither my husband nor I had any employment income last year, but we did have unemployment and investment income. However, my husband worked full time on our investments to provide us the income we had to have to live. I think I read that there is a way we can consider this income from his work as income we may contribute to our IRAs for the year?
A. Thisis possible. However, you must be able to show the IRS that you invest only for short-term profit and not long-term investing and not dividends or interest income. Additionally, you must show that your activity provides most of your support and that you conduct the activity regularly and continually. All gains are considered ordinary income – not capital gains – and are reported on Schedule C. You must be aware of many rules governing this activity. Look at the IRS Tax Topic 429 or speak to your tax advisor for more information.
Q. I started graduate school last year and received a scholarship and a stipend for my graduate work. My stipend totaled about $8,000 that I have been told that I must pay income tax on. Can I contribute any of this to my IRA?
A. Yes, providing you receive a W2 form. If you do, the amount shown in box 1, minus any amount shown in box 11 – which would probably not apply to you – is the amount you may use to contribute to your IRA, up to the maximum contribution limit for that year.
Q. Last year my wife and I had a reportable income of about $150,000. Near the end of the year, we sold some stock that was from a brokerage in my husband’s name for a net capital gain of about $50,000. This will put us over the Modified Adjusted Gross Income (MAGI) limit for contributing to our RIRAs. Could we file our taxes separately, combining husband’s income and real estate gain on his return and keeping my income of about $55,000 so that I can contribute to my RIRA?
A. You can certainly file separately, but you will not be able to contribute to your RIRAs. When a couple files as ‘Married Filing Separately,’ the ability to contribute to a RIRA begins phasing out immediately and is fully phased out at an AGI of $10,000. Thus, neither of you would be able to contribute to your RIRAs if you file separately.
