You cannot contribute to either a standard IRA or a Roth IRA without earned income. You can, however, convert an existing standard IRA to a Roth in a year in which you do not earn income. In fact, this would be an ideal year in which to do the conversion because your tax liability will be minimal or nonexistent.
Standard IRA vs. Roth
In a standard IRA, commonly referred to as a traditional IRA, you contribute “pre-tax” dollars but are taxed on both your contribution and its earnings when you withdraw money from the account. “Pre-tax” means the contribution is subtracted from your income before taxes are determined, thus lowering your tax liability in the contribution year. In a Roth, you contribute “after-tax” dollars but owe no tax on either the contribution or earnings when you withdraw. “After-tax” means you are taxed on your entire income, including the money you contribute to a Roth. In essence, a traditional IRA gives you a tax break in the years you contribute. A Roth IRA gives you a tax break when you withdraw. You can only contribute to either a traditional or Roth IRA if you have earned income equal to or in excess of your contribution.
The IRS lets you convert a traditional IRA to a Roth IRA by paying tax on whatever amount of money you convert. You can choose to convert as much or as little money in any one or several traditional IRA accounts. The money is taxed as ordinary income. Thus the higher tax bracket you are in, the greater tax you will pay. While you need to have earned income in years in which you contribute to either a traditional or Roth IRA, you do not need to have earned income to convert one type of IRA to another.
The most significant reason to convert an IRA to a Roth is to avoid taxes on future earnings. The longer you will be keeping your money in an IRA, the more beneficial a Roth is compared to a traditional IRA. You must begin making withdrawals from a traditional IRA no later than age 70-1/2,whereas there are no withdrawal requirements of a Roth. Therefore, if you do not think you will need the money in your Roth until you are older or you may never need it and will want to include your Roth account in your estate, it becomes even more valuable. Heirs can continue to benefit from tax-free growth in your Roth even after your death.
Benefits of Converting Without Income
In deciding whether to convert your IRA to a Roth, an important consideration is your tax liability for the conversion. If you took a tax deduction during a year in which your income was high and you convert the IRA when your income is low or otherwise nonexistent, you will benefit not only from the future tax exemption of earnings, you will be paying less in taxes on the original contribution than you earned in tax benefit when you made the contribution and your tax liability on the earnings to date will be lower than they would have in a year in which you earned more.
- Internal Revenue Service: Publication 590, Individual Retirement Accounts
- MarketWatch; Avoid These Roth Conversion Mistakes; Robert Powell; April 2010
- “Kiplinger”; FAQs on the New Roth Conversion: Kimberly Lankford; January 2010
- Internal Revenue Service. "Income ranges for determining IRA eligibility change for 2021." Accessed Nov. 3, 2020.
Mary Gallagher runs Mary Gallagher Planning (mgaplanning.com), an urban planning and consulting business in San Francisco. She is the former assistant planning director for San Francisco and planning director for San Mateo. Gallagher has been writing about real estate, development and land use for numerous websites since 1995. She holds a master's degree in historic preservation planning from Cornell University.