New Visitors Privacy Policy Sponsorship Contact Us Media
Baby Boomers Family Green Home and Auto In Critical Condition Just Starting Out Lifestyle Money
- advertisement -
Bankrate.com
News & Advice Compare Rates Calculators
Rate Alerts  |  Glossary  |  Help
Mortgage Home
Equity
Auto CDs &
Investments
Retirement Checking &
Savings
Credit
Cards
Debt
Management
College
Finance
Taxes Personal
Finance

Dr. Don Taylor, CFA, Bankrate.com advice columnist Considering a nondeductible IRA

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

- advertisement -

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."

Bankrate.com's corrections policy-- Posted: March 29, 2007
More Q&A stories from Dr. DonAsk a question
 RESOURCES
Get our free consumer update each week
Can I have a spousal IRA?
Staying home no reason to move IRA
 TOP INVESTING STORIES
Fame & Fortune: Monica Seles
10-year Treasury-buyer beware
9 cash-saving strategies that pay big bucks


CDs and Investments
Compare today's rates
NATIONAL OVERNIGHT AVERAGES
1 yr CD 0.90%
2 yr CD 1.09%
5 yr CD 1.74%
Mortgage calculator
See your FICO Score Range -- Free
How much money can you save in your 401(k) plan?
Which is better -- a rebate or special dealer financing?
VIEW MORE CALCULATORS
- advertisement -
- advertisement -

About Bankrate | Privacy Policy/Your California Privacy Rights | Online Media Kit | Partnerships | Investor Relations | Press Room | Contact Us | Sitemap
NYSE: RATE | RSS Feeds |

* Mortgage rate may include points. See rate tables for details. Click here.
* To see the definition of overnight averages click here.

Bankrate.com ®, Copyright © 2014 Bankrate, Inc., All Rights Reserved, Terms of Use.