As the baby boom generation inches ever closer to retirement, the need for retirement savings is at an all-time high. Many options are available to the fully employed. What about the underemployed or the unemployed? Their retirement needs are equally important. Should they be forced into a position where retirement is an unobtainable dream?

IRA rules allow some of these individuals to save for their retirement goals through spousal individual retirement account (IRA) contributions. Legislation passed in June 2001, which raised the contribution limits, may make these spousal contributions even more attractive.

Over the years, myths about spousal IRA contributions have surfaced. This article will debunk some of those myths and look at the impact increased contribution limits may have on spousal IRA contributions beginning with tax-year 2002.

Who is eligible?
To be eligible for a spousal IRA contribution, an individual must be married on the last day of the tax year (December 31), file a joint federal tax return, and be otherwise eligible to make an IRA contribution (younger than age 70 1/2 for traditional IRAs, income within certain limits for Roth IRAs). Spousal IRA contribution rules allow joint filers to "pool" their income to meet the earned income-requirements.

Myth #1: Spousal IRAs need special contracts and disclosures to establish.
Truth: A spousal IRA is not really an IRA at all, but a special method for married couples to determine their maximum annual traditional or Roth contribution. An individual may make a variety of contributions as well.

Myth #2: Spousal contributions are made on behalf of the lesser-compensated or noncompensated spouse, but into the higher compensated spouse's IRA.
Truth: Individual contributions may not exceed $2,000 for 2001 [except for rollover, transfer, conversion, recharacterization, or Simplified Employee Pension (SEP) contributions]. A more highly compensated spouse makes a spousal IRA contribution into the IRA of his/her lesser-compensated or noncompensated spouse.

Myth #3: the higher compensated spouse must make a regular contribution of an equal or greater amount as the spousal IRA contribution.
Truth: Contributions need not be made into both IRAs. I higher compensated spouse may decide not to contribute to his/her own IRA, but make a full contribution on behalf of his/her lesser-compensated spouse.

Myth #4: Spousal IRA contributions can only be made to traditional IRAs.
Truth: The spousal IRA contribution rules apply to both the traditional IRA and the Roth IRA. Each spouse may fund a traditional IRA, a Roth IRA, or both, as long as the total IRA contribution for each individual does not exceed $2,000 for 2001.

Myth #5: Spousal IRA contributions are not deductible from federal income taxes.
Truth: The deductibility rules do not exclude spousal IRA contributions. Spousal contributions made to a traditional IRA fall under the same deductibility rules as regular contributions. Active participation, income tax filing status, and modified adjusted gross income are all factors when determining deductibility of spousal or regular IRA contributions.

Myth #6: An IRA custodian/trustee reports spousal IRA contributions in a different manner.
Truth: A custodian/trustee does not make a distinction between regular and spousal contributions for Internal Revenue Service (IRS) reporting purposes. When reporting contributions on IRS Form 5498, a custodian/trustee reports traditional IRA contributions, whether regular or spousal, in Box 1. Likewise, they use Box 10 to report Roth IRA contributions, whether regular or spousal.

Legislative Impact
In June 2001, Congress passed the Economic Growth and Tax Relief Reconciliation Act (EGTRRA). Among other things, EGTRRA increases IRA contribution limits beginning in 2002, and provides an even higher limit for taxpayers who are at least age 50.

Depending on age, each spouse may not be entitled to the same contribution amount. As always it is up to each IRA owner to determine her/her eligibility for any IRA contribution. An individual should seek professional tax or legal advice to determine his/her eligibility for an IRA contribution and the amount allowable. However, IRA custodian/trustees should be aware of the spousal IRA contribution rules and future contribution limits to help prevent potential problems.