Maximizing Tax Benefits by Coordinating Spousal Retirement Contributions

Does it matter which spouse is contributing to a retirement account?

Editor's Note: Today's post comes from James Enriquez, a tax strategist at Adaptive Tax Planning. Adaptive Tax Planning is a sponsor on the site but is not paying to have this post published. All guest posts, even those from partners, have to meet editorial guidelines to be published. In this article, I thought James had some tax strategy ideas worth discussing when it comes to deciding which spouse should be making retirement account contributions.

 Does it matter which spouse is contributing to a retirement account? This is a question we hear often. A lot of the times it doesn’t really matter for tax reasons. On the other hand, there are some nontax reasons why which spouse contributes to retirement matters, but this post will only focus on the tax reasons. While a lot of the times there is no tax difference, there is a tax difference in certain situations. This post will discuss three such scenarios.

IRA deductibility

Every taxpayer that has earned income can make a traditional IRA contribution, but not every taxpayer can take a deduction for said contribution. A married filing joint taxpayer “covered” by an employer sponsored retirement plan at work can deduct a traditional IRA contribution if the couple’s modified adjusted gross income (MAGI) is less than $104,000 in 2020. The deduction is partial for income that falls between $104,000-$124,000, and the deduction is completely disallowed if income is greater than $124,000.

If a spouse is not covered by a retirement plan at work but the other spouse is, the noncovered spouse can take a deduction if the couple’s MAGI is less than $196,000. The deductibility rules get a lot easier if both spouses do not have a retirement plan at work. There is a full deduction. Let’s take a look at an example:

Example: Jack and Jill are married filing joint with a modified adjusted gross income of $150,000. Jack has a pension plan at work, and Jill does not have a retirement plan at work. Jack will not be able to take a deduction if he contributes to an IRA since he has a pension at work and their income is above the threshold. However, the couple would be able to take a deduction if Jill contributes to an IRA since she does not have a workplace retirement plan and their MAGI is below the threshold.

This is a scenario where which spouse makes the traditional IRA contribution can impact their current tax situation.

Big age gap

This tax reason is a long term play with very little current benefits. As the subheading suggests, there could be a potential tax benefit down the road when deciding which spouse should make retirement contributions, and it primarily relates to the delay of Required Minimum Distributions (RMDs). In most cases, RMDs are required to start at 72 years of age, and the distribution amounts are based on a life expectancy table and the account balance on December 31 of the previous year.

In an attempt to limit the tax impact, the younger spouse would contribute to their retirement plan more than the older spouse. Doing so would reduce the size of the older spouse’s retirement account which would also decrease the RMD amount.

Example: Jack just turned 72 and needs to take his RMD, but he doesn’t really want to because Jill, 63, is still working so they’re in a higher tax bracket than what they would be if she was retired.

The smaller Jack’s retirement account is, the smaller the RMD would be. On the flip side, they are making Jill’s account and RMD bigger, but hopefully, those RMDs will be taxed at a lower rate due to the loss of Jill’s employment income.

QBI deduction

The Tax Cuts and Jobs Act has been referred to as the biggest tax reform since 1986. As such, it brought the creation of a new deduction called the “qualified business income” deduction. In a nutshell, it allows up to a 20% deduction of eligible “qualified business income” for owners of sole proprietorships, partnerships, S Corporations, and some trusts and estates. This code section is extremely complex which is outside the scope of this post but will be addressed in a later post.

While we are not going to discuss every provision of the deduction, we should have a basic understanding. Qualified business income is essentially profit. The higher the expenses, the lower the profit. The lower the profit, the lower the QBI. The lower the QBI, the lower the QBI deduction. Couples with a business owner spouse may want to consider the tax impacts before deciding which spouse should contribute to a retirement plan.

Example: Jack and Jill’s AGI is $150,000. Jack is a 72-year-old solo practice attorney with QBI of $100,000, and Jill is a 63-year-old teacher with a $50,000 annual salary. After reviewing their budget, Jack and Jill decide they can afford to save $25,000 per year toward their retirement. They like to keep everything equal so they are thinking about contributing $12,500 each to a retirement account, but they know the limit for traditional IRAs is much lower. So, they visit with a financial advisor.

The financial advisor tells them about a 403b for Jill and a SEP IRA for Jack since he is the only employee of his firm. It sounds good because the retirement contribution deduction is the same if the contributions are made into the 403(b) or SEP, but Jack and Jill decide to run it by their tax pro, too. Their tax pro points out that Jack will be reducing his QBI deduction by contributing to a SEP compared to making the entire $25,000 contribution to Jill’s 403(b).

By contributing $12,500 to Jack’s SEP, he would be reducing his QBI and the deduction to $87,500 ($100,000 QBI – $12,500 SEP contribution) and $17,500 ($87,500 new QBI multiplied by 20%), respectively. If they make the entire $25,000 contribution to Jill’s 403(b), the QBI deduction would be $20,000 ($100,000 QBI multiplied by 20%). That’s not a huge difference, but it could be a bigger difference with bigger numbers.


It is not always a forgone conclusion on which spouse should contribute to a retirement account. It is pretty straight forward a lot of the time, but these are three different scenarios where some proactive tax planning can help decide which spouse should contribute to retirement.

Joshua Holt is a former private equity M&A lawyer and the creator of Biglaw Investor. Josh couldn’t find a place where lawyers were talking about money, so he created it himself. He knows that the Bogleheads forum is a great resource for tax questions and is always looking for honest advisors that provide good advice for a fair price.

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    Two thoughts on Maximizing Tax Benefits by Coordinating Spousal Retirement Contributions

    1. Hi Joshua. I really enjoyed your article; it hit many great points that I talk about with my clients regarding their IRA. As a tip to the audience, I just wanted to note that IRAs also have the potential of affecting your Medicaid eligibility. Once RMBs are required at age 72, the IRA is payout status. If the IRA is in payout status, the IRA itself does not affect Medicaid eligibility. However, Medicaid eligibility is affected by every required withdrawal from the IRA, as that is counted as income.

      Sometimes, however, depending on your state, your IRA may not be in payout status before you want to apply for Medicaid. For example, if Jack lived in Virginia, he could apply for Medicaid at 65 years old. Jack in this case has several options to make sure that he is eligible at that age. One of the options, as mentioned in your article, is to make sure that his IRA is as small as possible. Another option is to spend off the IRA, or he could transfer money in his IRA to Jill or another family member. Unfortunately, the latter method could be penalized by income taxes.

      Here is a link to my blog for reference, where I go into more depth about how IRAs and 401(k)s could affect your Medicaid eligibility.

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