Whether you're a stay-at-home mom or just taking some time off from work doesn't mean you should take a break from saving for retirement. And thanks to more generous federal guidelines, it's easier than ever to keep that nest egg growing. Congress hiked IRA contribution levels to $4,000 and loosened deductibility rules for all married couples. Here's what you need to know about the current IRS guidelines for joint filers, whether one or both spouses work.
The Nonworking Spouse
A nonworking spouse can make a deductible IRA contribution of up to $4,000 for 2005 ($4,500 if age 50 or older as of 12/31/05) as long as the couple files a joint return, and the working spouse has enough earned income to cover the contribution. However, the deductibility of the nonworking spouse's contribution is phased out for couples with adjusted gross income (AGI) between $150,000 and $160,000, provided that the working spouse is covered by a qualified retirement plan (via a job or self-employment). The working spouse's ability to make a deductible contribution for 2005 is phased out starting at AGI of $70,000. (See the table below for phase-out ranges.)
For example, say a married couple has 2005 AGI of $100,000. All the income is from the wife's job, and she is covered by a qualified retirement plan at work. The nonworking husband can make a $4,000 deductible contribution (because joint AGI is well under the $150,000 threshold for the phase-out rule). If he will be age 50 or older as of 12/31/05, he can contribute and deduct $4,500. However, the working wife cannot make a deductible contribution (because joint AGI is well in excess of the $80,000 top end for the phase-out range).
The following point is often misunderstood. When neither spouse participates in a qualified retirement plan (via a job or self-employment), both the nonworking spouse and the working mate can make deductible contributions of up to $4,000 to traditional IRAs -- $8,000 in total -- regardless of AGI. For example, say the couple's joint AGI is $400,000 from one spouse's self-employment activity. If that spouse has no retirement plan, each spouse can make a $4,000 deductible IRA contribution ($4,500 each if both are age 50 or older).
Both Spouses Work
Similarly, when both spouses work but neither participates in a qualified retirement plan, both can make deductible IRA contributions of up to $4,000 -- for a total of $8,000 -- regardless of the couple's AGI level. The only limitation is that they must have at least $8,000 of earned income between them. (Each spouse can contribute and deduct an additional $500 if he or she will be 50 or older as of 12/31/05.)
Now what if both spouses work, and both participate in qualified retirement plans? In this scenario, the restrictive AGI-based phase-out ranges shown in the table below apply to both. For example, if the couple's joint 2005 AGI exceeds $80,000, neither spouse can make a deductible IRA contribution for that year. But if their joint 2005 AGI is $70,000 or below, they can both make $4,000 deductible contributions (for a total of $8,000). (Each spouse can contribute and deduct an additional $500 if he or she will be 50 or older as of 12/31/05.) Thankfully, the phase-out range is scheduled to be adjusted upward gradually between now and 2007. In that year, the range will be a much more generous $80,000 to $100,000. In the meantime, here are the ranges for 2005 and beyond:
Finally, what if both spouses work, but only one is a participant in a qualified retirement plan? In this case, the participant spouse's ability to make deductible contributions is limited by the phase-out ranges shown in the above table (for instance, the range for 2005 is between AGI of $70,000 and $80,000). The nonparticipant spouse is covered by the much more liberal $150,000-to-$160,000 phase-out range explained at the beginning of this article. For example, say the couple's joint AGI for 2005 is $90,000, and the husband is a qualified-plan participant while the wife is not. He cannot make a deductible IRA contribution because the AGI exceeds the $80,000 top end of the phase-out range that applies to him. However, the wife can contribute and deduct up to $4,000 ($4,500 if she will be 50 or older as of 12/31/05) because the couple's joint AGI is well below the $150,000 starting point for the phase-out range that applies to her.
Is this all quite confusing? Definitely. But you now have the full story on deductible IRA contributions.
Roth IRA Contributions
With Roth IRAs, deductibility is not an issue. Contributions are made with after-tax dollars. The payoff is that all 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. However there are still AGI-based contribution limits. Specifically, eligibility to contribute to a Roth IRA is phased out between AGI of $150,000 and $160,000 for couples filing jointly, and between $95,000 and $110,000 for singles. If you think those ranges are too low, consider the phase-out rule for married individuals who file separate returns. For them, eligibility phases out between $0 and $10,000 of AGI. Obviously, few people in this category will qualify.
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