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Can You Contribute to an IRA If You Don't Have a Job?

Dear Carrie,

Can you put money in an IRA or a Roth IRA if you don't have wage income?

—A Reader 

Dear Reader,

Individual Retirement Accounts (IRAs) were introduced in the mid-'70s to help employees save for retirement and reduce their taxable income. So it stands to reason that to make a contribution—and get the tax benefit—you'd have to have income from a job. And, in fact, contributions to both traditional and Roth IRAs can only be made from what the IRS determines to be "earned income." However, wages aren't the only form of earned income. So let's start by looking at the definition.

What's considered earned income

You don't have to work for someone else to have taxable earned income. You can also work for yourself. Compensation from either type of employment would be considered earned income. But the complete definition is a bit broader. According to the IRS, taxable earned income includes:

  • Wages, salaries and tips
  • Union strike benefits
  • Long-term disability benefits received prior to minimum retirement age
  • Net earnings from self-employment

In terms of an IRA contribution, the amount of your earned income is also important. The maximum contribution you can make for 2011 is $5,000 ($6,000 if you're over 50). But if your taxable income is less than the maximum contribution, you can only contribute up to the actual dollar amount of your earned income for the year. In other words, you can't contribute more to your IRA than you earn.

What about unearned income?

Because there are other ways to make money, it's probably equally important to understand what's not considered to be earned income. Things such as interest and dividends from investments, pensions, Social Security benefits, unemployment benefits, and child support—even though they may factor significantly in your monthly bottom line—aren't considered earned income for tax and IRA contribution purposes.

The Spousal IRA exception

Fortunately for married couples, there is one way to make a contribution to an IRA if you don't have wages—a Spousal IRA. This is a tax-advantaged retirement account designed specifically to allow a working spouse to make contributions on behalf of a nonworking spouse. Under current laws, if you're married filing jointly, you can contribute the maximum into an IRA for each spouse—even if one of you has no earned income—as long as the working spouse has income equal to both contributions.

So let's say both you and your spouse are over 50 and want to contribute the maximum of $6,000 to each of your IRAs. Whichever one of you is working would have to have earned income of $12,000 or more to cover both contributions.

Another good thing about the Spousal IRA is that, should the non-working spouse go back to work, he or she can contribute to the same IRA. That's because, once opened, a Spousal IRA is an Individual Retirement Account like any other.

Making retirement top priority no matter what

Even if you don't qualify for the tax advantages of an IRA or other type of retirement account, if you have income from other sources besides wages, I advise you to save for retirement—and save consistently. Open an investment account or other type of savings account, earmark it for retirement and direct a percentage of your income to that account each month. Ideally, you could set up an automatic transfer from your online checking account into your savings account to make it easier on yourself. Then, should your earnings situation change and you find you're able to contribute to an IRA or participate in an employer-sponsored plan, you'll be ahead of the game.

Have a personal finance question? Email us at askcarrie@schwab.com. Carrie cannot respond to questions directly, but your topic may be considered for a future article. For Schwab account questions and general inquiries contact Schwab.

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Important Disclosures

All opinions expressed here are subject to change without notice in reaction to shifting markets, as well as changes in tax and estate planning rules. Any examples provided are for informational purposes only and are not intended to be reflective of actual results.

The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The type of securities and investment strategies mentioned may not be suitable for everyone. Each investor needs to review a security transaction and investment strategy for his or her own particular situation. Data contained here is obtained from what are considered reliable sources. However, its accuracy, completeness or reliability cannot be guaranteed.

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The information provided here is for general informational purposes only and is not intended to be a substitute for specific individualized tax, legal or investment planning advice. Where specific advice is necessary or appropriate, consult with a qualified tax advisor, CPA, financial planner or investment manager. 

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