Nonworking Spouses Can Save for Retirement, Too.

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Ask Carrie: Carrie Schwab Pomerantz - The Personal Side of Money

Nonworking Spouses Can Save for Retirement, Too.
by Carrie Schwab-Pomerantz, CFP®, President, Charles Schwab Foundation; Senior Vice President, Schwab Community Services, Charles Schwab & Co., Inc.
March 26, 2009

Dear Carrie,

I need information on Spousal IRAs. Who qualifies? What’s the maximum amount to contribute, etc.?

—Elmer

Dear Elmer,

Good questions. I believe a lot of people are unaware of the Spousal IRA and are missing a great opportunity to increase their retirement savings. Qualifying is fairly easy. Under current laws, if you are married filing jointly, you can contribute the maximum into an IRA for each spouse—even if one of you has no earned income—as long as the working spouse has income equal to both contributions.

Sounds simple enough on the surface. And ultimately it is. But as your question implies, there are a few specifics you need to understand to make certain you’re getting the full tax benefit—and saving up to the max.

Contribution limits

The contribution limit for a Spousal IRA is the same as for a regular IRA: $5,000 for tax years 2008 and 2009. And the catch up contribution is also the same: an extra $1,000 if you’re 50 or older.

So you and your wife can contribute a total of $10,000 for ’08 or ’09 ($12,000 if you both qualify for the catch-up) as long as one of you has earned income equal to or greater than your total contribution.

Tax deductibility

If the working spouse DOES NOT participate in a retirement plan at work, the contributions for BOTH spouses are tax-deductible – regardless of your income (once again, as long as you have sufficient income to cover the contribution).

If the working spouse DOES participate in an employer-sponsored plan, it gets a bit trickier because the rules vary for each spouse depending on yearly income. Here are the basics:

Nonworking spouse—For 2008, a nonworking spouse’s IRA is deductible for married filing jointly if the couple’s adjusted gross income (AGI) is no more than $169,000. Deductibility is phased out with an AGI of between $159,000 and $169,000 ($166,000-$176,000 in ’09).
Working spouse—For joint filers, the deductibility of the working spouse’s contribution in ’08 is phased out with an AGI of between $85,000 and $105,000 ($89,000 and $109,000 in ’09).

As with most tax issues, it’s always wise to consult with your tax advisor to determine how these limits apply to you.

Spousal Roth IRA

You can also fund a Spousal Roth IRA depending on your income. To qualify for a Roth IRA for 2008, a couple cannot earn more than $169,000. And, similar to a traditional IRA, eligibility phases out with an adjusted gross income between $159,000 and $169,000. These limits also go up in 2009.

Remember that a contribution to a Roth IRA is made with after-tax dollars and is never deductible. On the positive side, however, withdrawals are tax-free. Depending on your income now—and projected future income—a Roth might make sense for you or your wife.

Work status changes

The beauty of a Spousal IRA is that it lets you keep saving for retirement, no matter what your current work status. So if one of you isn’t working for whatever reason, as long as you’re married and filing jointly you can still continue to work together on your retirement savings—and take maximum advantage of the potential for tax-deferred growth.

And even if a nonworking spouse starts working, he or she can keep contributing to the IRA because, once opened, a Spousal IRA is an Individual Retirement Account like any other.

Opening a Spousal IRA is a smart move, possibly doubling your savings power. Remember that the deadline for opening and funding an IRA for 2008 is April 15, so you still have time to make your contribution for the ’08 tax year. While you’re at it, you might get a jump on 2009 and be ahead of the game.

Good luck!

Important Disclosures

The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The type of investment strategies mentioned may not be suitable for everyone. Data contained here obtained from third-party resources are considered reliable sources. However, its accuracy, completeness or reliability cannot be guaranteed.

This information is not intended to be a substitute for specific individualized tax, legal or investment planning advice. Where specific advice is necessary or appropriate, Schwab recommends consultation with a qualified tax advisor, CPA, financial planner or investment manager.

(0309-8281)

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