Generally to make IRA contributions, you need working income from which you contribute. However, there is a retirement option for a nonworking spouse. The non-working spouse can make contributions to either a deductible (traditional) IRA or a Roth IRA based on his working spouse's income. This exception gives 'soon-to-be' retirees both a way to pack more into their retirement savings, and reduce taxable income. Both-using a Roth IRA -can create non-taxable income for later use.
The maximum contribution that each spouse can contribute in 2011 is $5,000 plus an additional $1,000 'catch-up' contribution if you are 50 or older. That is an extra $6,000 savings contribution by the nonworking spouse per year for those last five or so years before a 'working spouse' retires.
To take advantage of the nonworking spouse retirement option, two conditions must be met:
- Both spouses must file jointly
- The income of the working spouse must cover the total contributions of both spouses
Retirement Option for Roth IRA Contributions
Both spouses, if filing a joint tax return, can contribute the maximum to their own Roth IRAs as long as the working spouse's income is below $167,000 (or $167K for short). Between $167K-177K contributions of both spouses are phased to $0. Roth IRA contributions are not deductible but are made with after tax contributions. And there are not limitations based on the working spouse being covered by a retirement plan at work.
Retirement Options for Deductible (traditional) IRA Contributions
Both spouses can contribute to their own deductible IRAs. But each spouse's contribution has different limits associated with the working spouse's income, depending on whether or not the working spouse is covered by a retirement plan at work.
In the case where there is no retirement plan at work, both the working and nonworking spouse have the retirement options to make the maximum contribution no matter how high the working spouse's income is.
If the working spouse has a retirement plan at work, his contribution will be limited and phased out starting when his income reaches $89K (see table for complete contribution limits). However, the nonworking spouse's contribution will not begin to be phased out until the working spouse's income reaches $167K.
As an example, if Mr. Smith is covered by a retirement plan at work and makes $120K, he will not be able to make a deductible contribution to an IRA. His nonworking wife, however, has the retirement options to make the maximum contribution to her deductible IRA or her Roth IRA. Mr. Smith, as an alternative could contribute the maximum to his Roth IRA.