In this article we outline thoughts and questions to consider with your tax and financial advisors if you are considering a withdrawal from your Spousal IRA to pay for your Entry Fee in a CCRC or Life Plan Community.
Please note: While this page is not tax or financial advice, it is meant to give you a good baseline for a conversation with financial professionals who specialize in tax and retirement account management. A few hours of time with a tax or other licensed financial professional could save you a lot of money in unexpected tax consequences.
Spousal IRA Overview
If you are thinking of ways to pay for your Entry Fee to a Life Plan Community or CCRC, you may be considering accessing the funds you have accumulated in a Spousal IRA. Often, the year you move into a retirement community you may consider a larger than average withdrawal to cover your Entry Fees, Purchase, or Deposits. This may create more taxable income. Reviewing the below questions and thoughts with your financial advisor can help you get a head start to smart planning!
Do I have a Spousal IRA?
You have a “Spousal” IRA if you are not working, and your spouse is working, or has worked, and contributes, or has contributed, to an IRA in your name.
This is an exception to the rule that you have to earn income before you contribute to an IRA. However, the contributing spouse must earn at least the amount that is contributed to both of your IRA’s.
Spousal IRA’s can be set up as Roth IRA’s or Traditional IRA’s and the same rules that apply to them apply to Spousal IRA’s respectively. See [insert link here] for information concerning Traditional IRA’s and [insert link here] for information concerning Roth IRA’s.
What kind of Contributions did I make into my Spousal IRA?
The answer to this question depends on whether your Spousal IRA was set up as a Traditional IRA or a Roth IRA. Visit the appropriate page to see the specific answers to these questions for a discussion with your tax or financial advisor.
Do I have to make withdrawals from my Spousal IRA?
If your Spousal IRA was set up as a Traditional IRA, you may be subject to the Required Beginning Date. Until you reach your Required Beginning Date defined as the date at which you must begin making withdrawals or your Required Minimum Distributions, the earnings and gains within the traditional IRA account are tax deferred.
If your Spousal IRA was set up as a Roth IRA, withdrawals are not required until the death of the owner. Visit the Traditional IRA or Roth IRA page for the specifics depending on which account you had established.
What is my Required Beginning Date (RBD)?
If your Spousal IRA was established as a Tradtional IRA:
Age 70 ½ for anyone who reached that age before 12/31/2019;
Age 72 if you reached that age between 1/1/2020 and 12/31/2022;
Age 73 if you reached that age after 1/1/2023.
Age 75 if you reach age 74 after 12/31/2032
The first withdrawal must be made by April 1st of the year following your Required Beginning Date. In subsequent years, your first withdrawal must be made by December 31st of that yea
What is a Required Minimum Distribution (RMD) and how do I know what the minimum distribution should be?
If your Spousal IRA was originally established as a Traditional IRA, you may be subject to the RMD regulations.
According to the IRS, Required Minimum Distributions (RMDs) are minimum amounts that IRA and retirement plan account owners generally must withdraw annually. For an easy to use calculator that can generally estimate your Required Minimum Distribution (RMD) visit the AARP website at the link provided here.
Please note: No representations are made as to the accuracy of this calculator. Accurate estimates should be provided by a licensed tax or financial professional. By clicking on this link you are leaving the Second Act website:
Things to consider when withdrawing funds from a Spousal IRA
What portion of my withdrawal will be taxable?
If your Spousal IRA was established as a Traditional IRA: The portion of the withdrawal from a Traditional IRA that is taxable depends on the ratio between non-deductible and deductible contributions. You cannot choose which contributions to withdraw first.
If you did not file IRS Form 8606 when after-tax contributions were made, you may have to pay tax on the entire withdrawal.
What is the 10% penalty and how can I avoid it?
For Spousal IRA established as a Traditional IRA a 10% additional tax is applied if you withdraw or use IRA assets before you reach age 59 ½, unless an exception applies. For example, unreimbursed medical expenses that exceed 7.5% of your adjusted gross income may be exempt from the tax.
For Spousal Roth IRA’s, only qualified distributions are tax free and penalty free. To be considered a qualified distribution, the following criteria must be met:
- The owner of the account must have had the Roth IRA open for at least 5 tax years:
- The 5-year clock starts with your first contribution to any Roth IRA
- Each IRA-to-Roth IRA conversion has its own 5-year period
- The owner must be 59 ½ years old or permanently disabled
- Non-qualified distributions are subject to income taxes and a 10% penalty:
- The penalty (but not the taxes) can be avoided under certain circumstances: For example, un-reimbursed medical expenses that exceed 5% of your adjusted gross income
What is the 25% penalty and how can I avoid it?
If your Spousal IRA was established as a Traditional IRA and you do not take any distributions after your Required Beginning Date or the distribution is not large enough, the IRS could impose a 25% excise tax on the amount not distributed as required. This may be reduced to 10% if you correct the missed RMD in a timely manner.
Can I take out a loan against my Spousal IRA?
Borrowing money from a Spousal IRA or using it as security for a loan are considered prohibited transactions that will result in additional tax.
Is there a limit to the amount I can withdraw annually from a Spousal IRA?
There is not a limit to the amount you can withdraw from a Traditional Although there is no official limit we strongly recommend you review how much to withdraw each year with your tax and/or financial advisors.
Eight questions to ask your tax or financial Advisors before withdrawing from your Spousal IRA account to pay for your Entry Fee:
1. What kind of a Spousal IRA account do I have? Was it established as a Traditional IRA or a Roth IRA?
2. What portion of my IRA is attributable to non-deductible/after-tax deductible/pre-tax contributions?
3. How much can I withdraw from my Spousal IRA without going into a higher income tax bracket?
4. If I do go into a higher income tax bracket what is the likely:
(a) additional federal or state income tax?
(b) Medicare surcharge?
(c) additional portion of my social security income that could be taxed?
(d) higher capital gains taxes if I sell stock during the year because I am in a different tax bracket?
5. If I am under 59 ½, do any of the exceptions to the 10% penalty apply?
6. Does my community determine an annual ratio of medical expenses to total expenses that I can share with my accountant? If so, can I use this information to deduct a portion of my entrance fee and/or monthly fee from my income as a medical or other expense?
7. Can I take advantage of this deduction if I do not itemize and simply take the standard deduction? Or do I have to itemize and is it worth itemizing?
8. Do I have more tax-efficient ways to fund my move into my CCRC or Life Plan Community?
A Bridge Loan could be another financing option if withdrawals from retirement accounts are not recommended by your financial advisors.
If after consulting with your tax or financial advisor withdrawing from retirement accounts or selling your securities is not something you want to do, there are other funding options. Second Act provides a Home Equity Line of Credit that can act as a bridge loan to help you pay for your CCRC or Life Plan Community Entry Fees so you can move in first and have the time you need to list and sell your home for the best possible price.
With fast approval, competitive rates, and a special focus on serving seniors, we could help because we understand. Contact us today to learn more about how we can help you navigate your journey to a rewarding retirement.
Important Disclaimer
The information in this page is not meant to serve as financial, tax, or personal financial planning advice. No decisions should be made from reading the information on this page. Decisions should be made after careful analysis and consultation with your financial, tax, accounting, or other professional advisor licensed to provide retirement advice.
Second Act is a Division of Liberty Savings Bank, F.S.B. Member FDIC. Lending and loan services provided by Liberty Savings Bank, F.S.B. NMLS # 408905. Equal Housing Lender. All other services provided by Second Act Financial Services, LLC. This information is current as of 1/01/2023. Subject to credit and loan approval. Conditions and limitations apply. Information, rates and terms are subject to change without notice. © 2023 Second Act Financial Services, LLC. All Rights Reserved.
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