Funding An IRA For The Nonworking Spouse Of A 401(K) Participant

Posted on: 7 June 2017

A nonworking spouse in a married couple may perform years of unpaid work carrying out household and family duties. Most retirement accounts can be held in the name of only one individual, so the working spouse is usually the registered owner of any 401(k) funds. As a practical matter, a married 401(k) owner is likely to view the account as a joint asset. However, a participant in a 401(k) plan may also fund an individual retirement account for a nonworking spouse.

An individual without earned income cannot fund a 401(k) account. An IRA is different, in that a working spouse may provide the contribution to fund an IRA for a nonworking spouse. You don't need to fund an IRA for yourself in order for your nonworking spouse to deduct an IRA on your joint tax return. The decision of whether to fund an IRA for a nonworking spouse ideally comes into play after your own 401(k) benefits are optimized.

Maximizing the employer contribution

Your employer may add additional funds to your 401(k) contributions in accordance with the plan's own predetermined formula. The contribution formula is important because it provides motivation for you to contribute at least the amount necessary to receive the most 401(k) funding from your company.

The maximum amount of wages you may direct into your 401(k) plan is generally $18,000 per year. If you have attained age 50 or older by the end of the year, the annual limit is $24,000. Employer 401(k) plans typically only allow employee contributions of up to a specified percentage of income, so your actual contribution limit may be less than $18,000.

Even though employers can add additional amounts to your 401(k) account, the combined contributions cannot exceed $54,000. Most companies, however, contribute substantially less than the potential maximum. In fact, the employer match is typically based on only a relatively small percentage of an employee's income.

Funding the spousal IRA

Once the employer match is maximized, your final step is to decide how much to contribute to your nonworking spouse's IRA. At this point, a contribution to a traditional IRA for your spouse provides a tax-deferral benefit similar to that of simply increasing your 401(k) contribution. You can generally direct up to $5,500 of your wages to your nonworking spouse's IRA. If your spouse is at least age 50 at the end of the year, the IRA contribution limit is $6,500.

The deadline for funding an IRA is the April due date of the tax return for the applicable year, providing a few additional months to decide on the exact contribution amount. Contact a financial adviser at a company like Family Financial Partners for more information about IRA planning strategies.