Don't Overlook the Spousal IRA
One frequently overlooked tax benefit is the "spousal IRA." Generally,
IRA contributions are only allowed for taxpayers who have compensation (the
term "compensation" includes: wages, tips, bonuses, professional
fees, commissions, alimony received, and net income from self-employment).
Spousal IRAs are the exception to that rule and allow a non-working spouse
to contribute to their own IRA, otherwise known as a spousal IRA.
The maximum amount that a non-working spouse can contribute is the same
as the limit for a working spouse, which is $4,000 for years 2006 and 2007.
If the non-working spouse is age 50 or older, the spouse can also make "catch-up"
contributions (limited to $1,000 for 2006 and 2007), raising the overall
contribution limit to $5,000. These limits apply, provided the couple
together has compensation equal to or greater than their combined IRA contributions.
Example: Tony is employed and his W-2 for 2006 is $100,000. His wife, Rosa, age 45, has a small income from a part-time job totaling $900. Since her own compensation is less than the contribution limits for the year, she can base her contribution on their combined compensation of $100,900. Thus, Rosa can contribute up to $4,000 to an IRA for 2006.
The contributions for both spouses can be made either to a Traditional or Roth IRA, or split between them, as long as the combined contributions don't exceed the annual contribution limit. Caution: The deductibility of the Traditional IRA and the ability to make a Roth IRA contribution are generally based on the taxpayer's income:
Traditional IRAs - There is no income limit restricting contributions to a Traditional IRA. However, if the working spouse is an active participant in any other qualified retirement plan, a tax-deductible contribution can be made to the IRA of the non-participant spouse only if the couple's adjusted gross income (AGI) doesn't exceed $150,000. This limit is phased out for AGI between $150,000 and $160,000.
Roth IRAs - Roth IRA contributions are never tax-deductible. Contributions to Roth IRAs are allowed in full if the couple's AGI doesn't exceed $150,000. The contribution is ratably phased out for AGI between $150,000 and $160,000. Thus, no contribution is allowed to a Roth IRA once the AGI exceeds $160,000.
Example: Rosa, in the previous example, can designate her IRA contribution to be either a deductible Traditional IRA or a nondeductible Roth IRA since the couple's AGI is under $150,000. Had the couple's AGI been $155,000, Rosa’s allowable contribution to a deductible Traditional or Roth IRA would have been limited to $2,000 because of the phase out. The other $2,000 could have been contributed to a nondeductible Traditional IRA.
Please give this office a call if you would like to discuss IRAs or need assistance with your retirement planning.
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