Funding IRAs When One Spouse Is Unemployed

Editors' pick: Originally published Sept. 14.

Funding an IRA when one spouse is unemployed or taking a sabbatical can occur if the working spouse makes the contribution.

The spouse who is earning income can support the contribution of the non-working spouse's account, said John Bowen, a retail sales supervisor for Equity Institutional, a financial planning firm in Westlake, Ohio. Whether the spouse contributes to a company 401(k) is not relevant.

The contribution can be up to $5,500 for people up to the age of 50 and $6,500 if you are 50 or older in 2016.

"You can fund an IRA if you don't work, as long as the other spouse has enough earned income to cover your contribution," said Ben Barzideh, a wealth advisor at Piershale Financial Group, a financial planning firm in Crystal Lake, Ill..

Investors need to be aware of the income thresholds to determine if the contribution is deductible. The deductibility of the IRA for the non-working spouse phases out between $184,000 to $194,000 based on the modified adjusted gross income (MAGI) in 2016. The deductibility of the IRA for the spouse who is also allocating money into a 401(k) is lower and the phase out is from $98,000 to $118,000 of the MAGI, Barzideh said.

Mitchell Langbert, an associate professor of business management at Brooklyn College in N.Y. and a former benefits manager, said he has been contributing to a Roth IRA for himself, but a regular IRA for his spouse who is not working.

"The spousal contribution boosts your limit to $10,000 below the age of 50 and $13,000 above the age of 50," he said.

Since Langbert said he earns less than $184,000 and his wife is not employed, they file their taxes jointly and receive a deduction for his wife's regular IRA. The couple will have to pay taxes on her withdrawals when she reaches 70.5.

Why a Roth IRA Is Good Option

Many investors opt to allocate their retirement savings into a Roth IRA because only the contributions are taxed.

"In my opinion, it is the single most powerful wealth creation tool and I personally put as much money as I can into a Roth IRA," said Bowen.

A Roth IRA allows interest to compound without being taxed and funds can be allocated even if you are under 59.5 years old without paying the 10% premature withdrawal penalty if they are used for college tuition and expenses.

Roth IRAs have another benefit and contributions can be withdrawn at any time without paying either taxes or penalties.

Once investors reach retirement age of 70.5 years old, they are not required to take minimum distributions like they would if the money was allocated in a traditional IRA, said Barzideh.

Unlike a traditional IRA, if you are older than 70.5 and you or your spouse has earned income, you can still contribute to a Roth IRA.

"After you pass away, your beneficiaries can also continue the tax free benefit of the Roth IRA," he said.

The income threshold for Roth IRA eligibility in 2016 is also $184,000 to $194,000 of MAGI for married filing joint, but in this case the phase out applies to both the non-working spouse as well as the working spouse covered by the 401(k), said Barzideh.

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