Saving for retirement has become an important financial goal for most couples, and the sooner you start, the more money you'll stash away. It can be tricky to set aside enough cash for the future if one of you isn't working, but the federal government makes it easier to save by issuing a tax break when you put money into your traditional individual retirement account for a non-working spouse. Whether your spouse is taking a break to raise the kids, unemployed, attending school or simply has no earned income, both contributions may still qualify for the IRA tax deduction when you file a joint return.
Each spouse, including a non-working spouse, may contribute up to $5,000 per year into an IRA, for a total of $10,000, as long as the couple has enough earned income to cover the full contribution of both individuals, and they file a joint tax return. The annual limit goes up to $6,000 for individuals over age 50, for a possible maximum contribution of $12,000 per couple. Earned income includes self-employment income, wages, commissions or other compensation, but does not count interest, dividends, excluded foreign income, non-taxable combat wages or pensions.
Depending on your total adjusted gross income and whether the working spouse is covered by an employer's retirement plan, the IRS may limit how much of your traditional IRA contribution can be deducted. If neither spouse is covered by an employer's retirement plan, you can deduct the full amount against taxable income up to the maximum allowed for the tax year. As of 2012, if the working spouse contributes to an employer plan, your deduction is phased out for AGI over $173,000, and there is no IRA deduction for AGI over $183,000.
Calculating a Reduced Deduction
The IRS doesn't make it easy to figure your reduced deduction when the working spouse has a retirement plan at work. They supply a worksheet in Publication 590 Individual Retirement Arrangements to calculate the non-deductible percentage of the contribution if your AGI exceeds $173,000. The remaining contribution is not tax deductible and must be reported on Form 8606. Commercial tax preparation software simplifies this process for you.
Only traditional IRAs are eligible for tax deductions, so if you don't qualify for the full IRA deduction, consider putting the non-deductible portion of your contribution in a Roth IRA instead. You won't need to file Form 8606, and you get the same tax-deferred benefits as your retirement savings grow. Since you already paid tax on the contribution, you'll never owe tax on the money when you take it out for retirement. Each spouse can contribute a combined total of $5,000 ($6,000 if over age 50) to traditional or Roth IRAs, so it's a good place to park any non-deductible contributions while still saving the maximum each year.
Naomi Smith has been writing full-time since 2009, following a career in finance. Her fiction has been published by Loose Id and Dreamspinner Press, among others. She holds a Master of Science in financial economics from the London School of Economics and a Bachelor of Arts in political economy from the University of California, Berkeley.