Non-working spouses can contribute to an IRA

QUESTION: My wife stopped working last year. Can she still contribute to an IRA for 2014 without a job?

Moisand: There are many cases in which a non-working spouse can contribute to an IRA. For 2014 contributions, the dealine is April 15.

For a single taxpayer, the maximum contribution for 2014 is the lesser of 100 percent of that person’s earned income (wages, alimony) or $5,500. If the person is over age 50, an additional $1,000 “catch-up” contribution can be made if their earnings exceed $6,500.

For joint filers, a non-working spouse can use the working spouse’s earnings to qualify. A person making $13,000 or more would qualify members of a couple for a $6,500 contribution, including the catch-up.

The amount of the working spouse’s earned income determines whether those contributions can go into a traditional IRA or a Roth. Whether a spouse is a “covered participant” in a qualified retirement plan like a 401(k) or 403(b) determines whether a contribution to a traditional IRA is deductible from gross income. The mere presence of a 401(k) at a former employer does not itself constitute “coverage”.

If neither is covered, both contributions are fully deductible. If either is covered, the non-covered spouse can deduct at least part of their contribution if the couple’s Modified Adjusted Gross Income (MAGI) is under $191,000. A covered spouse can deduct at least part of their contribution if MAGI is under $116,000.

If no deduction is allowed, contributing to a Roth IRA is preferred over making a non-deductible contribution to a traditional IRA. However, neither spouse can make a full contribution to a Roth IRA if MAGI equals or exceeds $181,000. Partial contributions are allowed up to a MAGI of $191,000 but equal to or over that no Roth IRA contribution can be made.

So, if MAGI is $191,000 or greater and either spouse is covered by a retirement plan, the only IRA contribution that can be made by either spouse is a non-deductible contribution to a traditional IRA. Also, persons age 70 ¹/₂ or older cannot contribute to a traditional IRA but can contribute to a Roth IRA, subject to income parameters.

For 2015, the maximum contribution is the same as for 2014 but the income limits mentioned rise slightly. The rules can be confusing but in the twists and turns, we often find opportunity.

Dan Moisand, CFP® is a past national President of the Financial Planning Association and has been featured as one of America’s top financial planners by at least 10 financial planning publications, dan@moisandfitzgerald.com 321-253-5400 ext 101.