Who can contribute to an IRA?

We are looking into the possibility of letting Jacqui stay at home as a housewife. However, we’re concerned that if it will impact our plan to catch up on retirement savings. So I studied IRS Publication 590, Individual Retirement Arrangements and found the following excerpts:

Traditional IRA:

  • You (or, if you file a joint return, your spouse) received taxable compensation during the year, and
  • You were not age 701/2 by the end of the year.

Roth IRA:
Generally, you can contribute to a Roth IRA if you have taxable compensation (defined later) and your modified AGI (defined later) is less than:

  • $160,000 ($166,000 for 2007) for married filing jointly or qualifying widow(er),
  • $10,000 for married filing separately and you lived with your spouse at any time during the year, and
  • $110,000 ($114,000 for 2007) for single, head of household, or married filing separately and you did not live with your spouse at any time during the year.

Besides the age restriction for traditional IRA and the income restriction for Roth IRA, a person need to have taxable compensation to contribute to an IRA. The taxable compensation includes salaries, tips, bonuses, commissions, self-employment income, alimony and separate maintenance, nontaxable combat pay but does not include passive income derived from property and investment (Table 1-1, Page 9). However, a non-working spouse (aka a housewife) can contribute to either IRA with the same maximums given the working spouse qualifies for the above criteria (Refer to spousal IRA in the above document).

So the good news is that if Jacqui stay at home, both of us will be able to contribute to IRA though it’s not necessarily Roth.