IRA Catch-Up Savings and Tax-Free Income for Nonworking Spouses of 'Soon-to-be' Retirees

Usually, you need to have a working income from which you can make your IRA contributions. The exception to this rule is for a nonworking spouse. She can make contributions to either a deductible (traditional) IRA or a Roth IRA based on her working spouse's (husband's) income. This exception gives 'soon-to-be' retirees an opportunity to contribute more to their retirement savings and create nontaxable income during their retirement income.

When trying to save as fast as possible for your retirement, a nonworking spouse can help out just by making an IRA contribution based on her working spouses' income if they file a joint return. Contributing to a traditional (i.e. deductible) IRA will lower current taxes while contributing to your IRA.

If you contribute to a Roth IRA, you can pull it out during retirement tax free. You don't get the deduction now but it'll produce tax free income during your retirement. Let's check over the rules for making IRA contributions for 2011.

The maximum contribution that each spouse can contribute in 2011 is $5,000 plus an additional $1,000 'catch-up' contribution if you're 50 or older. That's an extra $6,000 savings contribution by the nonworking spouse per year for those last 5 or so years before a 'working spouse' retires.

To take advantage of nonworking spouse IRA contributions two conditions must be met:

1. both spouses must file jointly and

2. the income of the working spouse must cover the total contributions of both spouses

*Roth IRA Contributions:

Both spouses can contribute the maximum to their own Roth IRAs as long as the working spouse's income is below $169,000 ($169K for short). Between $169K-179K contributions of both spouses are phased to $0. Roth IRA contributions are not deductible so their made with after tax contributions of working income. And there's no income limitation if the working spouse is not covered by a retirement plan at work.

*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 can 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 $90K. However, the nonworking spouse's contribution won't begin to be phased out until the working spouse's income reaches $169K.

As an example, if Mr. Jones is covered by a retirement plan at work and makes $120K, he'll not be able to make a deductible contribution to an IRA. His nonworking wife, though, can 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.


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