June 03, 2011|Carolyn Bigda, Chicago Tribune
It seems that every time I log on to Facebook these days I see another post announcing a new baby. And for many of the proud parents, one of the spouses will be leaving the workforce to care for the growing family.
The transition brings many changes, but for the stay-at-home parent it’s the end of contributing to an employer-sponsored retirement plan.
Does that mean putting retirement goals on hold? No, say financial planners. Just say hello to the spousal individual retirement account, or IRA.
How It Works
Under the tax code, you must have earned income (such as wages or commissions) in order to contribute to an IRA.
But for couples who file a joint tax return, the Internal Revenue Service allows a nonworking husband or wife to use the income of a spouse in order to qualify to make contributions.
So, if you’re a stay-at-home dad, you can put away up to $5,000 (the maximum contribution allowed in 2011) or $6,000 if you qualify for catch-up contributions (available to anyone age 50 and over), even if you have no earned income for the year.
If you and your spouse contribute to an IRA, you can set aside $10,000 in total. “Right there you double the amount you save,” said Joseph Alfonso, a financial planner in Lake Oswego, Ore.
A couple of caveats: Couples who file separately do not qualify for the spousal IRA. Also, you can save only as much as you earn: If your household’s total income is $8,000, your combined contribution cannot exceed $8,000. So you wouldn’t be able to use savings or investments to boost contributions.
The Benefits
Now, if you’re going from two incomes to one, finding an extra $5,000 to set aside for retirement might be a stretch. But here again the tax code offers some relief.
Normally, if you can participate in a retirement plan at work, you can fully deduct contributions to a traditional IRA if your adjusted gross income is $90,000 or less in 2011. After that, the deduction begins to phase out and completely disappears once your AGI hits $110,000.
But if you’re a nonworking spouse, you can receive a full deduction if your household’s earnings are $169,000 or less, and a partial deduction if the earnings are more than that but less than $179,000.
“You could be in a situation where the AGI fell between those limits, where the working spouse would be ineligible, but the nonworking spouse could make the deductible contribution,” said Mark Luscombe, principal federal tax analyst for CCH, a tax-prep software provider.