Spousal IRAs: A savings plan that's twice as nice

I think consistently funding an IRA with $4,000 every year is a reliable way to add to your retirement nest egg. It follows then that saving $8,000 a year would be twice as nice. If you are married, your nest egg could double through IRA contributions even if only one of you has earned income. Every married couple with at least $8,000 in earned income can contribute $4,000 to each of their own IRAs and benefit from tax-deferred savings for retirement, and possibly other financial goals as well. Additionally, those who are over age 50 can contribute an extra catch-up contribution of $500.

Spousal IRAs are a way for the nonworking spouses of wage earners to put aside funds for their financial future. Contributions made to a spousal IRA belong to the nonworking spouse even if contributions came from the wage-earning spouse. If neither you nor your spouse has made a contribution for 2004, you have until April 15, 2005, to do so. Choosing to fund your 2005 contribution early in the year as well could mean starting off 2005 with a grand total of $14,000 in contributions, or $16,000 if both spouses are over age 50.

IRA contributors may choose from a Traditional IRA or a Roth IRA, but $4,000 (or $4,500 for those age 50 or older) is the maximum annual contribution to either IRA or a combination of the two. IRA contributors must decide if they would like to contribute to a Traditional or a Roth IRA and if they are eligible for deductible contributions to the Traditional IRA.

Full contributions to a Roth IRA are possible for married couples filing jointly whose adjusted gross income is under $150,000. Partial contributions are possible with AGIs up to $160,000. All contributions to Roth IRAs are nondeductible; however, distributions are tax-free if held for at least five years and withdrawn after age 59. Tax-free distributions of up to $10,000 from a Roth IRA may be made for the purchase of a first home. Distributions for qualified higher education expenses are penalty-free. Contributions may be withdrawn tax- and penalty-free at any time.

The 2005 deductibility of one spouse's contribution to an IRA is no longer impacted by the employer-sponsored retirement plan of the other spouse. This means that if one spouse works and is not covered by a retirement plan, or is not earning income at all, then this spouse's contribution to an IRA is fully deductible as long as the couple's AGI is under $150,000. Partial deductibility occurs if AGI is between $150,000 and $160,000.

The 2005 deductibility limits of IRA contributions for married couples who file jointly and who both have retirement coverage at work have been increased. Fully deductible contributions for both spouses occur if AGI is below $70,000 and phases out with AGIs up to $80,000. These amounts will continue to increase gradually to $80,000 and $100,000, respectively, in the year 2007.

IRAs can make saving for long-term goals, such as retirement, a realistic family activity. I recommend you contact your financial advisor who can help you decide which IRA is suitable for your individual situation and can provide additional information on the features and benefits of both the Traditional and the Roth IRA. For more information, e-mail me at william.a.creekbaum@smithbarney.com or call 689-8700.

Smith Barney does not provide tax or legal advice. Please consult your tax and/or legal advisor for such guidance. Smith Barney is a division and service mark of Citigroup Global Markets Inc., member SIPC.

- William Creekbaum, MBA, CFP, a Washoe Valley resident, is senior investment management consultant of SmithBarney, a financial-services firm serving Northern Nevada.