If you’re married, you have the option of filing a joint tax return with your spouse or filing separate returns. This is called married filing separately. Filing separate returns might make sense if you earn similar incomes and you’re worried about being pushed into a higher tax bracket, or if one of you normally claims a significant amount of miscellaneous deductions.
Filing a separate return could save you money at tax time but it could affect your ability to save for retirement in an IRA. If you’re married and typically file separately, here’s what you need to know about making IRA contributions.
Saving in a Roth Could Be More Difficult
Roth IRAs can be a great way to save for the future while enjoying some tax advantages. With a Roth IRA, your qualified withdrawals are tax-free. If you expect to have a higher income in retirement, being able to withdraw money from a Roth tax-free wouldn’t add to your tax bill.
If you’re married filing separately, your ability to contribute to a Roth IRA hinges on how much you earn and your living arrangement.
If you lived with your spouse at any time during the year and your modified adjusted gross income was less than $10,000, you can contribute a reduced amount to a Roth IRA. If you make $10,000 or more, on the other hand, and you lived with your spouse during the year, you wouldn’t be able to contribute anything at all.
A different set of rules applies to couples who are married and file separate returns but don’t live together at all. If your modified adjusted gross income is less than $120,000, you could contribute up to the annual limit. The current annual contribution limit is set at $5,500, or $6,500 if you’re 50 or older. (In 2019 the limits are $6,000, or $7,000 for those 50 and over.) If you earn between $120,000 and $135,000, you could contribute a reduced amount. Anything over $135,000 would put you out of the income range to save in a Roth IRA. In 2019 the income phase-out limits are each $2,000 higher: $122,000 and $137,000.
A Traditional IRA May Be the Better Choice
A Traditional IRA doesn’t offer tax-free withdrawals in retirement but you do have the advantage of deducting your annual contributions. That could lower your tax liability, since deductions reduce your taxable income for the year. Whether you can take the deduction, however, when you’re married filing separately depends on your income, your living arrangement and whether you’re covered by a retirement plan at work.
If you’re covered by a plan at work
In this scenario, the amount you can deduct in Traditional IRA contributions really hinges on whether you lived with your spouse at any time during the year, and what you made. The IRS considers your filing status to be single even when you’re married if you and your spouse don’t live together.
If you and your spouse lived apart and your modified adjusted gross income was $63,000 or less, you can take the full deduction, up to the amount of your contribution limit. If you earned between $63,000 and $73,000, you’d be eligible for a partial deduction. If you made more than $73,000, you wouldn’t qualify to deduct any of your contributions. In 2019 the income phase-out limits are each $1,000 more, or $64,000 and $74,000.
If you lived with your spouse, the income limits for taking the deduction are much lower. You could snag a partial deduction if your modified adjust gross income is less than $10,000 but no deduction is allowed if your income is above that amount.
If you’re not covered by a plan at work
The deduction rules are similar for couples who file separate returns and aren’t covered by a retirement plan at work. What’s different are the income limits for couples who file separately and live apart. In that scenario, you could take the full deduction, up to the annual contribution limit, regardless of how much you make.
If, however, you file separate returns, live together and your spouse is covered by a retirement plan at their job, you’d only be eligible for a partial deduction, assuming that your modified adjusted gross income is less than $10,000. Again, if your income is over $10,000, you wouldn’t be eligible for any deduction at all.
The fact that you’re married filing separately may affect whether you can deduct Traditional IRA contributions, but it doesn’t bar you from making them. If you’re set on filing separate returns and your income is too high to contribute to a Roth, you may have to opt for contributing to a Traditional IRA instead and taking a partial or even no deduction. Talking with a tax or financial professional can help you determine whether filing separate returns makes sense, and which IRA is the right fit.