Funding a Family Member’s IRA / Contributing to the individual retirement accounts of a spouse, child or grandchild before April 15 can help boost their retirement security and potentially lower your tax bill.

Anne Tergesen for the Wall St. Journal writes: Funding the individual retirement accounts of family members before April 15 can boost their retirement security and potentially lower your tax bill.  Before putting money into the IRA of a spouse, child or grandchild, however, it’s important to understand the rules that apply to such contributions.

For married couples, the need for one spouse to contribute to an IRA for the other typically arises when one of the two drops out of the workforce or becomes unemployed. Normally, an individual must have compensation to be eligible to put money into an IRA. But in the case of a nonworking spouse, there is an exception, says Ed Slott, an IRA expert in Rockville Centre, N.Y. The loophole allows a working spouse to establish and fund an IRA in the nonworking spouse’s name.

“It is a great way for a stay-at-home parent or an unemployed spouse to keep their nest eggs growing,” he adds. Whether it makes sense to use a traditional IRA or a Roth IRA depends on your income, age and goals. With either type of account, an individual under age 50 can save up to $5,000 for 2012 and $5,500 for 2013. Those 50 and older can contribute up to $6,000 for 2012 and $6,500 in 2013.

With a traditional IRA, the nonworking spouse, who cannot be older than 70½, may be eligible to deduct from taxable income some or all of this annual contribution, thus reducing the couple’s tax bill. With a Roth, which allows contributions at any age, you invest with post-tax dollars but you withdraw earnings later on tax-free.

To qualify, though, a married couple has to meet certain requirements. If neither spouse is eligible to participate in a company-sponsored retirement plan, such as a 401(k), the couple can fully deduct the IRA contributions of both spouses—no matter how much money they make.

But if each is eligible for a 401(k)-style plan, they can only fully deduct their contributions if they earn less than $92,000. (The deduction phases out between $92,000 and $112,000.)

If one spouse—say, the husband—is eligible for a 401(k)-style plan but the other isn’t, the husband can deduct his contribution if the couple earns less than the $92,000 phaseout amount. But the wife can deduct her contribution even if they earn as much as $173,000. (Her deduction phases out between $173,000 and $183,000.)

Because nonworking spouses typically are ineligible for 401(k) plans, they often qualify for a deduction at the higher income limits, which can help some couples claim an extra deduction, says Mr. Slott.

Roth IRAs are good options for couples who expect to pay higher future tax rates or want to leave an IRA to beneficiaries. (The income limit is $183,000 for married couples filing joint tax returns.)

If you want to fund an IRA for a child or grandchild, a Roth is often a no-brainer, says Mr. Slott. Why? To contribute to an IRA, the child must have income. But because children often earn little, “the deduction they would receive for making a traditional IRA contribution would be almost worthless,” he says. Be aware that annual contributions to a child’s IRA can’t exceed his or her annual income.

If the child needs money for college or medical costs, he can withdraw the contributions tax- and penalty-free from a Roth IRA. And if the money is used for higher education, no early-withdrawal penalty is assessed on earnings either.