Retirement Options for Tax Savings for Soon-to-Be Retirees

Generally, to make IRA contributions, you'll need earned income from which you contribute. However, there's a retirement option for a non-working partner. The non-working spouse can make contributions to both a tax-deductible (conventional) IRA or a Roth IRA based on the working spouse's income. This exception provides 'soon-to-be' retired people both a way to pack more into their retirement savings, and reduce taxable income (using a traditional IRA). Alternatively--utilizing a Roth IRA--can produce non-taxable income for later use.

The maximum contribution that each partner may contribute in 2011 is $5,000 and also an extra $1,000 'catch-up' contribution if you're 50 or older. That is an additional $6,000 financial savings contribution by the non-working partner per year before a working spouse retires.

To make use of the non-working partner retirement option, two conditions should be met:

• Both partners should file jointly their tax returns
• The income of the working partner should cover the full contributions of both spouses

Retirement Option for Roth IRA Contributions

Each spouses, if filing a joint tax return, may contribute the maximum to their own Roth IRAs so long as the working spouse's income is below $167,000. Between $167K-177K , contributions of both partners are phased out and IRS does not permit Roth IRA contributions when the household income is above $177k. Roth IRA contributions are not tax-deductible but are made with after tax contributions. Note that the only restriction on Roth contributions is the tax return income and with no restriction pertaining to the working partner being covered by a retirement program at work.

Retirement Options for Deductible (conventional) IRA Contributions

Both spouses may contribute to their own deductible IRAs. However each spouse's contribution has different limits associated with the working spouse's income, depending on if the working partner is covered by a retirement plan at work.

Retirement Options for Deductible and Roth Contributions for Both Spouses: one working, the other non-working in 2011 Maximum Contribution: $5,000 (plus additional $1,000 if 50 or older) Requires: filing status to be 'married filing jointly'; working spouse's income
'At work' status of working spouse	Spouse	IRA type	Contribution	Working spouse's Income range
Covered by retirement plan	Working spouse	Deductible IRA	Maximum	Below 89K
"	"	"	Partial	89K to 109K
"	"	"	None	Above 109K
Not covered by retirement plan	Both working and non-working spouse	Deductible IRA	Maximum	No income limit
Whether covered or not covered	Non-working spouse – for Roth and Deductible IRA, Working spouse – for Roth only	Deductible IRA or Roth IRA	Maximum	Below 167K
"	"	"	Partial	167K to 177K
"	"	"	None	Above 177K

In the case where there is no retirement plan at work, both the working and non-working spouse have the retirement options to make the most contribution irrespective of how high the working spouse's earnings may be.

If the working spouse has a retirement plan at work, his contribution will be limited and eliminated commencing when his earnings actually reaches $89K (see table for total contribution limitations). However, the non-working spouse's contribution won't start to be eliminated till the working spouse's earnings actually reaches $167K.

As an example, if Mr. Smith is covered by a retirement plan at work and earns $120K, he'll not be able to make a deductible contribution to a traditional IRA (the kind that produces a tax deduction in the year of contribution). His non-working wife, however, has the retirement options to make the highest contribution to her deductible Individual retirement account or her Roth IRA. Mr. Smith, as an alternative could contribute the highest amount to his Roth IRA.