Additionally, you should not overlook the spousal IRA tax benefit. If you are a non-working spouse, you may be able to contribute to an IRA based on the compensation of your spouse.
Generally, IRA and Roth IRA contributions are available for taxpayers who have taxable compensation. You can contribute up to $5,500 for 2013 and 2014. If you are 50 or older, you are allowed to contribute up to $6,500 with a “catch-up” contribution. The spousal IRA rules are the exception because they allow a non-working spouse to contribute to an IRA or Roth IRA if you fall within the income limits. The couple must have a combined compensation equal to or greater than their combined IRA contributions.
Let’s say Richard earns $220,000 annually and is covered by a 401(k) at work. His wife, Michelle, is a stay-at-home mom. Richard contributes $5,500 to his IRA during the year. Even though Michelle does not earn wages, she can contribute $5,500 to an IRA because their combined income is more than $11,000. Richard and Michelle’s household adjusted gross income (gross income minus deductions) is more than $188,000; therefore, neither of their contributions are tax deductible.
But let’s look at their neighbors Ron and Susan, whose only income is from employment. Susan earns $90,000 during the year and Ron held a part-time job during the year earning only $2,000. Susan can contribute $5,500 to an IRA for the year, but Ron can contribute $6,500 because he is 52 and eligible for the catch-up contribution. Because their combined adjusted gross income doesn’t exceed $178,000 for 2013, his entire IRA contribution should be tax deductible. Even if Susan is covered by a 401(k) at work, her IRA contribution should be fully deductible.
Let’s look at another situation: Karen and Lenny. Karen is still a college student and earned $2,000 in tutoring. Her husband, Lenny, recently graduated and began working full time in 2013 but only earned $4,000. Their combined income is $6,000. If Lenny chooses not to make an IRA contribution, Karen can contribute up to $5,500 to her IRA because the spousal IRA rule applies only to the spouse with the lesser amount of compensation. If Lenny were to contribute to his IRA, he could only contribute up to $4,000 because he is not entitled to Karen’s earnings. Karen could then contribute up to $2,000 to her IRA because their total contribution cannot exceed their taxable income.
The spousal IRA rule determines how much you can contribute but does not change any of the other rules that govern IRAs. You still have to meet the eligibility requirements for contributions. Furthermore, the spousal IRA rule does not require you to account for the source of your contribution.