Stay-at-home parents or those taking a sabbatical can still save for retirement through a Spousal IRA. Just like any other IRA, the account and contributions are the property of the of the non-working spouse. Here's what you need to know to take advantage of yearly contributions and stay on the right path to retire comfortably.
Traditional IRA
A nonworking spouse can make a deductible IRA contribution of up to $5,000 for 2011 ($6,000 if age 50 or older as of 12/31/11) as long as the couple files a joint return, and the working spouse has an equal or larger amount of earned income. Nonworking spouse contribution's for 2011 are deductible up to specific limits and if the working spouse is an active participant in an employer qualified plan (401(k), SIMPLE IRA, etc.). The deduction phases out for couples with adjusted gross income (AGI) between $169,000 and $179,000. The working spouse's may make a deductible IRA contribution for 2011 if AGI is between $90,000 and $110,000.
Roth IRA Contributions
Non-working spouses also have the option of contributing to a Roth IRA. Roth account earnings along with the contributions can be withdrawn tax-free after age 59 1/2, provided the account has been open at least five years. Eligibility to contribute to a Roth IRA for 2011 is phased out between AGI of $169,000 and $179,000 for couples filing jointly, and between $107,000 and $122,000 for singles.
Other IRA Rules & Qualifications
When neither spouse participates in a qualified retirement plan, both the nonworking and the working spouse can each make deductible contributions of up to $5,000 ($6,000 when age 50 or above in that taxable year) to traditional IRAs regardless of AGI.
Similarly, when both spouses work but neither participates in a qualified retirement plan, both can make deductible IRA contributions of up to $5,000 in 2011 regardless of the couple's AGI. The only limitation is that they must have at least $10,000 of earned income between them.
If both spouses work, and both participate in qualified retirement plans then AGI-based phase-out range of $90,000 to $110,000 applies to both spouses.
When both spouses work but only one is a participant in a qualified retirement plan, the participant spouse's ability to make deductible contributions for 2011 is limited by the $90,000 to $110,000 phase-out range. The nonparticipant spouse is covered by the $169,000-to-$179,000 phase-out range explained earlier. This allows the non-participant spouse to contribute and deduct up to $5,000.