If you are married, you can file a joint tax return with your spouse or file separate returns. If your income is similar and you are concerned about moving to a higher tax bracket, it may make sense to file separately. It might also be a good idea if one of you normally claims a significant amount of miscellaneous deductions.
Filing a separate return can save you money at tax time, but it could affect your ability to save for retirement in an individual retirement account (IRA). If you’re married filing separately, here’s what you need to know about making IRA contributions.
- Traditional and Roth IRAs are a tax-advantaged way to save for retirement.
- With Roth IRAs, your income, marital status, and living arrangement affect your eligibility and contribution limits.
- With traditional IRAs, the advance tax deduction depends on your income, marital status, living arrangement, and whether you are covered by a plan at work.
Saving on a Roth could be harder
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. That’s an advantage if you expect to be in a higher tax bracket in retirement.
If you are married filing separately, your ability to contribute to a Roth IRA depends 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 (MAGI) is less than $ 10,000, you can contribute a reduced amount to a Roth IRA. You cannot contribute anything if you earn $ 10,000 or more.
A different set of rules applies if you are married filing separately and do not live together at all. If your modified adjusted gross income is less than $ 125,000 for 2021 ($ 124,000 for 2020), you can contribute up to the annual limit. For 2020 and 2021, the annual contribution limit is set at $ 6,000 per year, or $ 7,000 if you are age 50 or older.
If you earn between $ 125,000 and $ 140,000 ($ 124,000 to $ 139,000), you can contribute a reduced amount. Anything over $ 140,000 ($ 139,000 for 2020) would put you out of the income range for saving in a Roth IRA.
A traditional IRA may be a better option
A traditional IRA does not offer tax-free withdrawals during retirement, but it does have the advantage of deducting your annual contributions. That can lower your tax liability, since deductions lower your taxable income for the year.
You may be able to take the deduction if you are married and file separately. But it depends on your income, your living arrangement, and whether you are covered by a retirement plan at work.
Covered by a work plan
The amount you can deduct on traditional IRA contributions depends on:
- If you filed your taxes as “single,” “married filing jointly,” or “married filing separately.”
- Your income level.
If you and your spouse signed a divorce decree, resulting in you filing as “single” and your modified adjusted gross income is $ 66,000 or less for 2021 ($ 65,000 for 2020), you can take the full deduction . If you earn between $ 66,000 and $ 76,000 ($ 65,000 to $ 75,000 for 2020), you are eligible for a partial deduction. And you can’t deduct any of your contributions if you earn more than $ 76,000 ($ 75,000 for 2020).
If you and your spouse declared “married filing separately,” the income limits for taking the deduction are much lower. You can get a partial deduction if your modified adjusted gross income is less than $ 10,000. But no deduction is allowed if your income exceeds that amount.
Not covered by a work plan
The deduction rules are similar for couples filing separately and not covered by a retirement plan at work. What is different are the income limits for couples filing separately and living separately. In that scenario, you can take the full deduction, up to the annual contribution limit, regardless of how much you earn.
However, if you file separate returns, live together, and your spouse is covered by a retirement plan at work, you are only eligible for a partial deduction, assuming your modified adjusted gross income is less than $ 10,000. Again, if your income is over $ 10,000, you cannot take any deductions.
The bottom line
The fact that you are married and file separately may affect whether you can deduct traditional IRA contributions. But it doesn’t stop you from doing them. If you are determined to file separate returns and your income is too high to contribute to a Roth, you may need to choose to contribute to a traditional IRA and take a partial or no deduction.
Speaking with a financial or tax professional can help you determine whether it makes sense to file separate returns and which IRA is best for you.