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

Key Points

  • To make a contribution to either a traditional or Roth IRA, you have to have what the IRS defines as "earned income."

  • The one exception is a spousal IRA for a non-working spouse.

  • If you don't qualify for an IRA but have other sources of income, you should still make saving for retirement a priority.

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.

In fact, contributions to both traditional and Roth IRAs can only be made from what the IRS determines to be "earned income” or taxable compensation. However, wages aren't the only form of compensation so let's start by looking at the definition.

What's considered compensation

You don't have to work for someone else to have taxable compensation. You can also work for yourself. Compensation from either type of employment would be considered earned income.  

Compensation for purposes of an IRA contribution includes:

  • Wages, salaries, tips, etc.
  • Commissions, professional fees
  • Self-employment income
  • Alimony* and separate maintenance
  • Nontaxable combat pay

*  Under the Tax Cut and Jobs Act, this may change in 2019.

In terms of an IRA contribution, the amount of your earned income is also important. The maximum contribution you can make for 2018 is $5,500 ($6,500 if you're 50 or older). 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?

Of course, there are other ways to make money, so it's also 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.

Compensation for purposes of an IRA contribution does not include:

  • Earnings and profits from property like rental income, royalties
  • Interest and dividend income
  • Pensions or annuity income
  • Unemployment income
  • Social Security
  • Income from certain partnerships
  • Any amounts you exclude from income

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 traditional or Roth 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 $6,500 to each of your IRAs. Whichever one of you is working would have to have earned income of $13,000 or more to cover both contributions.

The same general rules apply when contributing to a spousal Roth IRA; however, there are limits on contributions if you make too much money. In 2018 for married couples filing jointly, the amount you can contribute phases out when your modified adjusted gross income (MAGI) is between $189,000 and $199,000.

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 (subject to income limitations for a Roth). That's because, once opened, a spousal IRA is an Individual Retirement Account like any other.

A word about IRA tax-deductibility

If you contribute to a traditional IRA, the fact that it's tax-deductible could be a big plus. But there are limitations on that tax-deductibility, depending on your income and whether you participate in an employer-sponsored plan.

If you contribute to a 401(k) or similar retirement plan, tax-deductibility is phased out between $63,000-$73,000 of MAGI for singles ($101,000-$121,000 for couples). If only one spouse participates in an employer-sponsored plan, those limits go up to between $189,000 and $199,000. And if neither spouse participates in a retirement plan through an employer, your traditional IRA contribution is fully tax-deductible regardless of your income.

Tax-deductibility rules for a Roth IRA, including a spousal Roth IRA, are different. With a Roth, you don't get an upfront tax deduction. The tax advantage of a Roth is on the back end because withdrawals are tax-fee once you've held the account for five years. 

Making retirement a top priority no matter what

Even if you don't qualify for the tax deduction of a traditional IRA, taking advantage of the tax-deferred growth can still make sense if you're investing for the long term. If you can't open a Roth or if you have income from other sources besides wages, I encourage you to still 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 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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