An IRA for you - and your spouse too

If your spouse isn't employed, you can still make a Roth IRA contribution in her name, but with limits. Money Magazine's Walter Updegrave tells you how.

By Walter Updegrave, Money Magazine senior editor

NEW YORK (Money) -- Question: I've contributed to a Roth IRA in the past and plan to do so again this year. My wife isn't employed, but I was wondering whether I can make a Roth IRA contribution for her too. If so, can we have a joint account or do we need two separate IRA accounts? - Raj, Edison, N.J.

Answer: Let me start by saying that you and your wife can't have a joint IRA account. The "I" in IRA stands for "Individual," and the feds really mean it. So a husband can have his an IRA. A wife can have her IRA. But they can't have a joint IRA.

Now, as to the question of whether you both can do Roth IRAs - with you providing the money for your nonworking spouse's contribution - the answer is yes, assuming you meet two requirements. First, you must have enough taxable compensation to fund both your contribution as well as your wife's. The max you can contribute to a Roth IRA this year is $4,000, plus another $1,000 if you're 50 or older. Next year, the max rises to $5,000.

So assuming you and your wife are under 50, you would need compensation income of at least $8,000 this year to contribute the max for both of you. The money doesn't specifically have to come from your paycheck. As an extreme example, if you earned only $8,000 and spent it on living expenses but had $8,000 in a savings account, you could transfer the money from savings into the Roth.

Ah, but as I mentioned before, there is a second requirement - namely, to make the maximum contribution for 2007, the modified adjusted gross income on your joint return must be $156,000 or less. You can make a partial contribution if your income is between $156,000 and $166,000. (For an explanation of what that mouthful of a term "modified adjusted gross income" means, click here. And for the income limits for singles and married couples not filing jointly, click here.)

By the way, things get much more complicated if you and your wife wish to do a traditional deductible IRA. That's because Congress, in its wisdom, has come up with a Byzantine set of rules that limit your ability to contribute to a deductible IRA depending on a number of factors, including your income and whether one or both of you is covered by a retirement plan at work. Rather than bore you with all the permutations, I'll just refer you to this easy-to-use calculator.

Just plug in a few simple pieces of information about yourself and your spouse, and voila! You automatically see which type of IRA you can fund and how large a contribution you can make. (I'm sure I don't have to tell you that the $4,000 max refers to the total contribution you and your wife can make this year. In other words, even if you qualify for both a Roth and a deductible IRA, you and your wife can't throw $4,000 in each, although you both could split $4,000 between a Roth and a deductible.)

Of course, you can argue back and forth whether you're better off doing a traditional deductible IRA or a Roth. My position is that doing either is usually better than doing neither.

If you really think you're likely to fall into a lower tax bracket in retirement, then theoretically at least, the deductible IRA is the better choice since you're avoiding paying taxes on your contribution when your tax rate is higher and you're paying the tax on your withdrawals at a lower rate. The opposite is true with a Roth. But a Roth has a few other advantages, which you can learn about by clicking here.

If you're contributing faithfully to a 401(k) - which means all the pre-tax contributions and earnings in your account will be taxed at ordinary income rates when you withdraw your money in retirement - I think it's generally a good thing to also have a Roth IRA from which you can draw money tax-free. (For more on the benefits of what I like to call "tax diversification," click here.

Whichever version (or versions) of IRA you go with, I think it's an excellent idea to fund them for both you and your wife. Think of it this way. If you invest $4,000 in an IRA this year and then do $5,000 each year for the next 20 years, you would have an account balance of just over $267,000, assuming an 8 percent return each year. Not bad.

But if you do the same for your wife, you're talking about a combined value of $535,000, more than half a million bucks. That can make a huge difference in your retirement lifestyle, especially if you're also contributing (as I hope you are) to your 401(k) or other company plan. Top of page