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Spousal IRAs: Still Time to Contribute for 2010

Families have until April 18th to make sure they haven't missed out on any tax incentives and breaks for 2010. An often overlooked opportunity for stay-at-home parents is the spousal IRA.

Recognizing that families with nonworking mothers and fathers are at a disadvantage when it comes to retirement, Uncle Sam allows many stay-at-home-parents the opportunity to set aside $5,000 (or $6,000 if you're 50 or older) in an individual retirement account (IRA). The working spouse just needs to earn enough to cover the contribution.

Spousal IRAs come in three flavors. Which one you choose will depend in part on your family's modified adjusted gross income. Here are your options, as described by Mark Steber, Chief Tax Officer for Jackson Hewitt Tax Service:

IRA Options
1. Traditional IRAs
The traditional IRA allows you to contribute $5,000 (or $6,000 if you're 50 years old or older) into an account and take a tax deduction on that money. Your contribution then grows tax deferred until retirement.

The rules: If the working spouse is covered by a qualified retirement plan at work (such as a 401(k)), then the non-working husband or wife's ability to make a deductible contribution into a spousal IRA starts to phase out at $167,000 and phases out entirely at $177,000 for 2010. (The rules for all spousal IRAs differ for married couples filing their tax returns separately.)

2. Roth IRAs
The second option is the Roth IRA. There's no upfront tax deduction here, but the money you contribute grows tax free. Once you're retired (and at least 59 1/2), your withdrawals won't get touched by Uncle Sam, provided you've held the account for at least five years.)

The rules: The income phase out levels for the Roth are the same as the traditional IRA and don't start for married folks filing together until modified adjusted gross income hits $167,000. It phases out entirely at $177,000.

Nondeductible IRA
If you're lucky enough to have family income that disqualifies you from the first two options, you could still opt for the nondeductible IRA. There's no question that this one isn't as attractive as the others. Still, Steber believes it's worth considering. Why? It's always nice to set aside money for retirement. And with a nondeductible IRA you can shift some assets from one spouse to the other since the money belongs to the person whose name is on the account, regardless of where it came from.

A nondeductible IRA has no income restrictions.

Do you have a spousal IRA?

Stacey Bradford is the author of The Wall Street Journal Financial Guidebook for New Parents.
Tax image courtesy of Flickr, CC 2.0.
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