Which Spouse’s IRA Should We Spend From (or Convert)?

A reader writes in, asking:

“You’ve written before about how to decide which accounts to spend from in terms of Roth, tax deferred, or taxable. [Mike’s note: see “Which Dollars to Spend First Every Year in Retirement” and “Roth Conversion Planning: a Step-by-Step Approach.”] If my husband and I want to spend, say, $60,000 from traditional IRA accounts this year or we want to do a $60,000 Roth conversion, how should we decide how much of that should come from my traditional IRA as opposed to his traditional IRA?”

Firstly to state an important caveat: the rest of the article will assume that we’re talking about a married filing jointly situation. If you and your spouse intend to file separately in a given year, then the simple answer is that it probably makes sense to prioritize spending (or conversions) from the IRA of the spouse who would pay a lower tax rate on those dollars of income in that year.

For a married couple filing jointly, other than making sure that each spouse meets their required minimum distribution (RMD) for the year (if applicable), the default strategy is simply to take dollars entirely from the IRA of the older spouse, because that will have the greater effect on minimizing future RMDs. RMDs are based on your life expectancy, so the spouse born in the earlier year has to distribute a greater percentage of their account balance each year. To use the reader’s example, if $60,000 were taken out of the older spouse’s traditional IRA, that would result in a greater reduction of future RMDs than taking $60,000 from the younger spouse’s IRA. And, all else being equal, smaller RMDs is a good thing because it gives you greater flexibility.

But there are other factors that can be more important.

For instance, if one spouse has a significant amount of basis in traditional IRAs (i.e., from having made nondeductible contributions), distributions/conversions of that spouse’s balances may be more advantageous due to a lower percentage of the distribution/conversion being taxable.

State income tax considerations can also play a major role.

As one example: Colorado offers a deduction of up to $24,000 for “pension/annuity” income for people age 65+ ($20,000 for people age 55-64). “Pension/annuity income” includes Roth conversions and other distributions from tax-deferred accounts. And this deduction operates on a per-person basis. So if you and your spouse (both age 65+, for our example) collectively wanted to convert $60,000 from tax-deferred accounts this year, and you have no pension/annuity income this year other than this intended conversion, you could each convert $30,000, so that only $6,000 for each of you ($12,000 in total) would be taxable at the state level. In contrast if you did $60,000 all from one spouse’s traditional IRA balance, $36,000 would be taxable at the state level.

And in some cases there may be non-tax factors to consider. For instance, if you and your spouse each have children from a prior marriage, and you’re each leaving your IRAs to your respective children, then there are what we might call “fairness factors” at play (e.g., perhaps it feels most fair to spend 50/50 from each spouse’s assets — or some other particular ratio — regardless of what might be best from a tax planning point of view).