How Much Can a Non-Working Spouse Contribute to Her IRA?

There's no need to stop funding your IRA if you have decided to try a stint as a stay-at-home parent or take a break from work. IRA regulations allow you to make a spousal contribution to your IRA as long as you meet eligibility requirements. If you and your husband file a joint tax return, you should be able to continue making regular investments in your IRA.

History of IRAs

The Employee Retirement Income Security Act introduced IRAs in 1974. ERISA allowed deductible contributions of $1,500 annually. The Economic Recovery Tax Act of 1981 opened the door for spousal IRA deposits but limited the annual contribution to $250. By 1986, legislators placed restrictions on high earners who also participated in a company retirement plan, capping their deductible IRA contributions based on income. Legislators continued to tweak contribution limits and deductibility features in the 1990s, raising the contribution limit for non-working spouses to $2,000 in 1996. Since then contribution limits have risen with inflation, and catch-up provisions now allow you to exceed the normal limit if you are older than age 50.

Income Requirements

IRA contributions must be made out of qualifying compensation such as salaries, commissions, wages and net self-employment income. You can make IRA contributions from taxable alimony, but you may not count pension or investment income. As long as the working spouse is not covered by a qualified retirement plan, both the spouses may make a fully deductible contribution if their family income covers their IRA contributions. In 2010, the family income must equal at least $10,000 to make the maximum $5,000 contribution to both IRAs. The individual contribution limit goes to $6,000 for anyone over age 50.

Deductibility Restrictions

Things get a little tricky if the working spouse is covered by an employer plan. In that case, both spouses may still contribute to an IRA but the deductible values start to decline. For the working spouse, deductibility phases out with an adjusted gross income between $89,000 and $109,000 in 2010. Income limits are higher for the non-working spouse, phasing out between $167,000 and $177,000. For example, if John and Mary report and AGI of $115,000 based on John's income, John's contribution exceeds his deductibility limit of $109,000. Mary can make a full contribution to her IRA because the family's AGI is less than $167,000.

Roth IRAs

You contribute to a Roth IRA with after-tax dollars, so you don't need to worry about deductibility. But Roth IRAs do restrict contributions for high earners. For married couples, eligibility to contribute to a Roth begins to phase out at $167,000 for those who file joint tax returns. Married couples who file separate tax returns probably won't qualify for contributions to a Roth IRA since the phaseout for eligibility begins at $0 and tops out at $10,000.

References

• Congressional Budget Office: Legislative History of IRAs
• Tax Guide For Investors: Qualifying Income for IRA Contributions
• SmartMoney: Spousal IRAs

Resources

• IRS: Publication 590 IRAs