Spousal IRAs recognize the important economic role non-employed spouses play in the family. Contributions can be to either a traditional or Roth IRA.

Unlike other IRAs, they allow a spouse with no earned income to qualify for an IRA. Spouses with some earned income, but not enough to fund an IRA fully, also qualify for the Spousal IRA.

The earned income test is the only difference between a Spousal IRA and the Roth or traditional IRA. With traditional or Roth IRAs, you must have earned income (wages, salaries, tips, etc.) to qualify.

Contribution limits follow traditional and Roth IRA guidelines of $4,000 for 2006 and 2007, $5,000 in 2008, and will be adjusted for inflation thereafter.

Taxpayers age 50 and over have a special catch-up period that allows them to add another $1,000 per year in 2006 and 2007.

If you file a joint tax return, total contributions for both the working and non-working spouse cannot exceed $8,000 for 2006 and 2007, or $10,000 in 2008. The working spouse must have sufficient earned income to fund both IRAs.

Spousal IRA owners who choose the traditional IRA face tests to determine how much of the contribution is deductible. The entire amount contributed to the Spousal IRA is deductible if the working spouse does not have an employer-sponsored plan.

If the working spouse has an employer-sponsored retirement plan, contribution to a non-working Spousal IRA may not be entirely deductible. In this instance, if the adjusted gross income is below $150,000, the non-covered spouse may still be able to deduct the entire contributions. However, the deduction for contributions for nonworking spouses where the working spouse is an active participant is phased out at adjusted gross income between $150,000 and $160,000 (jointly computed).

Spousal IRAs can serve as a supplement to other retirement programs. Depending on your current situation, a Roth IRA may make sense. Your contributions are not deductible from current income tax, but distributions in retirement are tax-free.

 

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