IRAs for (barely) working spouses
I have a client who is maxing out his IRA and wants to do so for his stay-at-home wife as well. She doesn’t work outside the home, but she does have a small side business and brings in $200-300 a month. Is she able to make a full contribution to her IRA? Or are her contributions limited to what she earned? If it’s the latter, do we use 1099 income or income after business deductions?
Permalink Submitted by mk foss on Wed, 2011-08-17 16:55
The spouse with little or no income can use the compensation of the higher earning spouse to qualify for an IRA contribution. See IRC 219(c).
If the spouse were using income from the small business, you use the net income less 1/2 the SE tax to determine the maximum IRA contribution. Form 1099 income is not a factor – even if no deductions were claimed the gross income shown must be reduced by 1/2 the SE tax. Although there is no SE tax if earned income is less than $400.