Four Savings Tips for One-Income Families
Fidelity Investments

 

If you and your spouse are among the couples today relying on a single salary, it may seem that contributing to an Individual Retirement Account (IRA) could require financial sacrifices that you're not eager to make.

But committing to a retirement plan is one of the most important things you can do to protect your financial future—especially if you're planning to share that future with someone you love.

Many people don't realize that a working spouse, without an employer-sponsored retirement plan, or a nonworking spouse, can still fully contribute to an IRA. Keep in mind that there are certain income limits for spousal Roth IRAs and Traditional deductible IRAs. Also, the accounts can't be combined; each spouse must open and maintain their own separate IRA.

If your joint income exceeds those income limits, you can still contribute to a spousal, nondeductible IRA if you meet other eligibility criteria.

To help you avoid an oversight that could cost you, here are some potential strategies that may help one-income families keep their retirement savings on track. Just remember: the deadline for making an IRA contribution for 2006 is April 17, 2007.

1. Contribute to a Roth IRA
If your combined annual household income is less than $150,000 for 2006 and $156,000 for 2007, you and your spouse may each be qualified to make a full contribution to a Roth IRA.

If your combined annual household income is more than $150,000 and less than $160,000 in 2006 or more than $156,000 and less than $166,000 in 2007, each of you may be able to make a partial contribution. Some of the benefits of a Roth are:

• Earnings grow federally income tax-free, provided certain conditions are met.
• Your contributions can be withdrawn tax-free and penalty-free any time.
• You may defer distributions during your lifetime and thereby gain greater flexibility in protecting your assets for your heirs, but certain distribution requirements apply after you die.

The maximum contribution limit for Roth and Traditional IRAs is $4,000 per year for 2006 and 2007. Investors age 50 or older in 2006 and 2007 can contribute an additional $1,000, making the maximum contribution amount $5,000, thanks to the "catch-up" provision.

The added catch-up contribution creates an extraordinary savings opportunity for those 50 and older. If you are eligible to contribute the maximum $5,000 for tax year 2007 by April 17, you can contribute up to $10,000 for the combined years. Couples must file a joint federal income tax return and combined contributions must not exceed $8,000 ($4,000 each) or $10,000 ($5,000 each) if age 50 or older.

Action Step: Open a Roth IRA or contribute to your Roth.

2. Make a tax-deductible contribution to a Traditional IRA
If neither you nor your spouse is covered by an employer-sponsored retirement plan, both of you could be eligible to make fully tax-deductible contributions to Traditional IRAs—regardless of your income level—as long as one of you earns enough compensation during the year to justify your contributions.

In other words, you can't make a $5,000 IRA contribution if you claim to have earned only $2,200 in income on your tax returns for the year. You can use the Traditional versus Roth comparison tool to help you see if you and your spouse can make tax-deductible contributions to your IRAs this year.

Action Step: Open a Traditional IRA or contribute to your existing IRA.

3. Open a spousal IRA
You might also consider a spousal IRA, which lets a spouse who earns little or no income to contribute up to the annual limit ($5,000 a year for 2006 and 2007) into an IRA for him or herself, as long as the other spouse earns enough to fund the contribution.

You can deduct a Traditional IRA contribution made by a non-wage-earning spouse from your taxes as long as:

• You and your spouse file a joint tax return.
• The working spouse is not covered by an employer's retirement plan.

Action Step: Learn more about spousal IRAs.

4. A checklist to help you stick to your retirement savings goals:

• Re-examine if changed household incomes have made you eligible for a Roth IRA.
• See if you or your non-wage earning spouse can make a tax-deductible contribution to a Traditional IRA.
• Look for hidden dollars from sources such as part-time jobs or tax refunds or small trade offs that you can put toward retirement.
• Create a schedule of regular IRA investments to break your contributions into smaller, more manageable chunks.