Considering a nondeductible IRA
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 Dear
Dr. Don,
Can I open a nondeductible IRA for my spouse, who is a stay-at-home mom and has no earned income? We do not qualify for either a Roth or a traditional spousal IRA.
Thanks,
-- Mike Missus
 Dear
Mike,
Yes you can. When you say that you're not eligible, I'm assuming
that your adjusted AGI exceeds $160,000, the top threshold for both the spousal
deductible IRA and the Roth IRA. The IRS Publication 590 explains nondeductible
contributions and Individual
Retirement Arrangements.
Although your deduction for IRA contributions
may be reduced or eliminated, contributions can be made to your IRA of up to the
general limit or, if it applies, the spousal IRA limit. The difference between
your total permitted contributions and your IRA deduction, if any, is your nondeductible
contribution.
The nondeductible IRA grows tax deferred. It's important
to file Form 8606 with your tax return in order to be able to later withdraw the
contributions without having to pay tax on them. Making nondeductible contributions
doesn't provide a great current tax advantage since you're contributing after-tax
dollars to the account and investment earnings will be taxed at ordinary income
levels when taken as qualified distributions. Arguably, you'd be better off investing
directly in stocks or mutual funds where capital gains will be taxed at a lower
rate than ordinary income. Qualified dividend income also gets taxed at a
lower rate than ordinary income, at least through 2010. The nondeductible
IRA is an interesting choice right now, since a change in the tax code allows
your spouse, in 2010, to convert the traditional IRA to a Roth IRA. Once
converted, qualified distributions of the investment earnings will be tax free. A
Bankrate article, "Does
nondeductible IRA make sense?" explains this strategy in greater depth.
Thanks to David Littell, professor of taxation and the Joseph E. Boettner
Research Chair at The American College for his assistance in answering this reader's
question. To ask a question of Dr. Don, go to the "Ask
the Experts" page, and select one of these topics: "Financing a
home," "Saving & investing" or "money." |
