Can I Contribute to an IRA if I Am on Unemployment Insurance?

Saving for your future makes sense whether you're just starting out or nearing retirement. When you lose a job, your concern for your future doesn't go away; it may even increase. Almost anyone can open an individual retirement account, or IRA, to sock away money for your later years.

The law allows you to make contributions from your wages to an IRA. If you're unemployed, you may still be able to contribute to an IRA, or open a new IRA, depending on your circumstances. Here's what you need to know about a traditional or Roth IRA and unemployment benefits.

IRS Compensation Definition

Federal regulations for IRAs allow you to contribute to an IRA, provided you earned wages, tips or other forms of compensation during the year. If you receive a W2, the amount in box 1 is your compensation, as far as the IRS is concerned.

Unemployment insurance isn't considered compensation. Though the benefits are taxable, they're considered a benefit payment. At the end of the year, you'll receive a form 1099-G showing how much you collected and any taxes that were withheld from your unemployment checks.

One note is that there was an exception to the taxation of unemployment income for the 2020 tax year due to the pandemic. The IRS allowed taxpayers to exclude a maximum of $10,200 in unemployment income from their taxable wages. Taxpayers who already filed taxes would receive any money due back for this adjustment automatically since the IRS didn't require anybody to amend their tax returns for this benefit.

Personal IRA Contributions

If you worked any part of the year and earned wages, you can still contribute to an IRA, up to the amount you earned or the IRS limit for the year. In 2021, the maximum contribution you could make was ​$6,000​, or ​$7,000​ if you're over 50 years old. If you worked part of the year and collected unemployment part of the year, you can still make contributions to your IRA.

Spousal IRA Contributions

If you were unemployed for the entire year but your spouse worked, you may be eligible for a spousal IRA, which allows you to contribute to an IRA if your spouse works and you don't. You can contribute up to ​$6,000​, or ​$7,000​ if you're over 50, and your spouse can also contribute the maximum to an IRA, provided your spouse earned an amount equal to or greater than your combined IRA contributions.

Using a Rollover IRA

When you lost your job, you may have also lost retirement benefits at that job. You're entitled to keep any amounts you contributed to the retirement plan, as well as any amount of the plan in which you're vested. You usually have the choice of leaving the funds in your employer's plan, withdrawing them or rolling them over into a new employer's plan.

If you have no new employer, you can roll your retirement money into a new IRA you set up for this purpose or into an existing IRA if you already have one. Rolling over to an IRA instead of cashing out your 401(k) will save you from taxes and the penalty for early withdrawal if you're younger than 59 1/2.