IRAs for Stay-at-Home Spouses

Mom and Dad don't collect a paycheck for staying home and washing a billion loads of laundry or cooking a thousand dinners, but you can bet they still want to retire. Don't let a brief or a permanent break from the workforce undermine that plan.

A spousal IRA can be just the ticket to make sure that both of you will be able to retire. Although IRAs typically require an individual to earn income from work, the rules make an exception for married couples with one working spouse and one stay-at-home spouse. In that case, both spouses can fund their own IRAs.

The guidelines
To qualify, the married couple must file their taxes jointly. The working spouse also must have earned as much income as the couple puts in IRAs for the year. But once you've satisfied those fairly straightforward criteria, it's time to step into the dizzying possibilities.

We'll start with the easiest option. You can open a Roth account for your beloved if your adjusted gross income is less than $166,000 in 2007 or $169,000 in 2008. (Be warned that you can't make the maximum contribution if you're at the upper end of that income range.)

The Roth IRA comes with a few perks that regular IRAs don't offer, like the opportunity to withdraw your own contributions without penalty, and permission to keep your money tucked away forever. And once you've paid taxes on the money deposited, you're done dealing with the IRS.

Deduct it?
In exchange, you give up the potential for an immediate tax deduction. If you'd rather take your cake now and pay your taxes later, investigate a traditional IRA. It's easier to qualify for a deduction when you're a non-working spouse.

To figure out your potential deduction, you'll need to know your income and whether the working spouse qualifies for a retirement plan through work. Then, meet the Joneses.

Mr. Jones works, and Mrs. Jones stays home. Mr. Jones is covered by a retirement plan at work. Mr. Jones starts to lose the full deduction for an IRA contribution when their joint income hits $83,000 in 2007 (and $85,000 in 2008). Mrs. Jones, however, can make a fully deductible contribution until their income reaches $156,000 in 2007 (and $159,000 in 2008).

Next door, the Smiths get wind of this retirement plan and want to keep up with the Joneses. Mrs. Smith works, but she does not have a retirement plan at the office. Mr. Smith stays home. Both Smiths can make fully deductible IRA contributions, regardless of their income.

Like all things taxes, you'll want to investigate the particulars before making a decision. Your IRA contribution may be partly deductible, depending on your income. Online calculators can help steer you in the right direction. Talk to a professional if you're not sure which option will prove most profitable. This is one case when a little money spent on good advice can prove quite profitable.

Manage it
Opening an IRA for your nonworking spouse lets you sock away a lot of extra money for retirement. You can still make deposits that count for 2007. So save $4,000 for last year, and then get to work saving the $5,000 allowed for 2008.

An IRA will not only help you save more for retirement, it might also help you save better. Your workplace plan probably shunts you into a variety of predetermined investment choices -- and they may not be your first choice.

Pick the best your workplace can offer, and use your IRA to cover the rest of your bases. It's a prime place to hold investments that might generate a lot of taxes, like inflation-indexed bonds or stocks that pay healthy dividends, such as Dow Chemical (NYSE: DOW  ) , GlaxoSmithKline (NYSE: GSK  ) , and Johnson & Johnson (NYSE: JNJ  ) .

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