Spousal IRA Information
A spousal Individual Retirement Account (IRA) is a tax-advantaged savings account that may be opened by the spouse of a worker, even if that spouse is not currently employed. A spousal IRA is indistinguishable from any other traditional IRA, as it possesses the same characteristics, features and benefits. The only distinction with a spousal IRA lies in the allowable contribution formula.
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IRA Characteristics
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IRAs are funded with pre-tax dollars, meaning you can take a tax deduction when you make a contribution, subject to IRS regulations. Contributions and earnings within IRA accounts grow tax-deferred until they are withdrawn. Most distributions from an IRA are taxable at ordinary income rates. Withdrawals taken before the age of 59 1/2 are generally subject to a 10 percent early withdrawal penalty. Upon reaching age 70 1/2, the IRS mandates required annual withdrawals from IRA accounts, based on the account value and the life expectancy of the account owner.
Spousal IRAs
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Normally, contributions may only be made to an IRA if you have earned income. However, the spousal IRA provision allows an IRA to be established in the name of a non-working spouse, subject to certain rules. To fund a spousal IRA, you must file a joint return, and the working spouse must earn enough income to cover contributions to both accounts.
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Contribution Limits
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For 2010, IRA contributions are limited to the lesser of $5,000 or the extent of your taxable compensation. The limit is raised to $6,000 if you are age 50 or older. Thus, contributions to your regular IRA and your spousal IRA can reach a combined $10,000, $12,000 if age 50 or older. If you or your spouse participated in a 401k plan and your employer went bankrupt, the affected spouse can contribute up to $8,000.
Deduction Limits
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The computation to determine IRA contribution deductibility varies depending on if you or your spouse are covered by a retirement plan at work. If either of you are covered by a plan and you file taxes jointly, as you must in order to contribute to a spousal IRA, then you are allowed a full deduction if your modified adjusted gross income (MAGI) is $89,000 or less. If your MAGI is $109,000 or more, you are not allowed any deduction at all. If your MAGI falls in the range between $89,000 and $109,000, your deduction is phased-out, based on where in the range your MAGI is. For example, if your MAGI is $99,000, or halfway between $89,000 and $109,000, your deduction is similarly halved. If you and your spouse are not covered by plans at work, the deduction is eliminated if your MAGI is $176,000 or more, and you are allowed a full deduction for an MAGI of $166,000 or less. The phase-out range is for MAGIs ranging from $166,000 to $176,000.
Roth IRAs
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A spousal IRA may be set up as a traditional IRA or as a Roth IRA. With a Roth IRA, contributions are made on an after-tax basis, so deductibility is not an issue. Contribution limitations are the same as with traditional IRAs.
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References
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