How to Contribute to a Roth IRA if You're Retired

Q: If I'm retired but my wife had income for 2015, and we file our taxes jointly, may I put money in a Roth using her income? — Jim

A: You may indeed use her income for a so-called spousal Roth IRA, which can be a terrific strategy for minimizing taxes in retirement.

“I recommend this to many of my clients,” says Mike Piershale, president of Piershale Financial Group in Crystal Lake, Ill., who notes that Roth IRAs do not have age limits for contributions. “You can take almost any investment that triggers taxable income and hold it in a Roth to avoid paying taxes on that income for the rest of your life.”

There are, of course, some restrictions.

First, you and your wife need to fall within the income limitations for a Roth. For 2015 returns, the ability to contribute starts phasing out for married couples filing jointly when their modified adjusted gross income reaches $183,000. They phase out completely at $193,000. For 2016 returns the range will be $184,000 to $194,000.

Your wife also needs to have enough earned income, such as from wages or self-employment income. Investment income does not qualify to make contributions to a Roth.

Simply put, her contributions cannot exceed her total taxable compensation. The good news: As long as she had $13,000 in earned income in 2015, you can contribute up to $6,500 to a Roth in your wife’s name and up to $6,500 to a Roth in your name, says Piershale. (This assumes you’re both over the age of 50; for anyone under 50, the contribution limit is $5,500.)

You have until April 18 of this year to make these contributions for your 2015 returns, and as long as your wife has earned income in 2016 you can do it again in 2016.

Once you’ve made these contributions, you’ll want to maximize the tax benefits by funding your Roth with investments that incur the biggest tax bill.

Some of the biggest culprits, says Piershale, are taxable corporate bonds including high-yield taxable bonds. “You’re taxed at ordinary income tax brackets which trigger the highest amount of tax,” he says.

Investments in a Roth IRA grow tax free, and earnings are not taxed on withdrawals — provided that you are at least 59 ½ and your initial contribution is at least five years old.

If you make your first contribution now based on your 2015 tax year, he says, the start date is January 1st of 2015. “We’ve told people to open a Roth with $10 just to start the five-year countdown, even if they are just thinking about contributing to a Roth,” says Piershale. Once you get past the five-year mark for your initial contribution you never have to satisfy this requirement again for future contributions.

Final consideration: If your wife’s income is high enough that it puts you in a 25% marginal tax bracket or higher, there may be benefits to contributing to a traditional IRA this year instead of a Roth if you qualify for the tax deduction on the traditional IRA, says Piershale.

Keep in mind that there is an age limit to make contributions to traditional IRA — 70 ½ — and you will need to weigh the upfront tax savings of a traditional IRA against the longer-term benefits of a Roth.

For example, many people drop into a lower bracket after they retire. In that case, it may make sense to open a traditional IRA while you’re working; if you’re in a 25% tax bracket you’re saving 25 cents on the dollar for every dollar you contribute. “Then when you retire, assuming your drop into a 15% tax bracket, you can convert this IRA to a Roth and only pay 15 cents on the dollar to do this,” says Piershale.

On the other hand, if you are in the 15% bracket right now you may be better off opening the Roth and forgoing the smaller upfront tax savings on the traditional IRA in a 15% tax bracket. Odds are that you will reach a break-even point on the Roth after about five or six years, at which point it will make more money on an after tax basis.