Can I Fund an IRA if I Don't Have Earned Income?

Traditional individual retirement arrangements (IRA) offer wage earners a way to save for retirement while deferring income taxes on retirement savings until after retirement. Roth IRAs give wage earners a way to build up tax-free income at retirement. Both types of IRA require that you earned or received taxable compensation during the year.

Compensation Defined

If you didn’t earn taxable compensation during the year, you can’t fund an IRA. The Internal Revenue Service (IRS) defines taxable compensation as wages, salaries, tips, fees, commissions or bonuses you receive from an employer for doing work or providing services. In general, taxable compensation is any sum reported in Box 1 of your Form W-2. Compensation for IRA qualification purposes also includes net income from self-employment, taxable alimony or separate maintenance payments, and military differential or combat pay. There is no mandatory compensation minimum you must earn before you can have an IRA.

Unearned Income

The IRS says unearned income is not compensation for IRA qualification purposes even though you may pay taxes on the money. The IRS defines unearned income as proceeds and profits from real estate such as rental income. Unearned income also includes interest and dividends from investments, income from pensions or annuities, deferred pay postponed from a past year, or income from a passive partnership where you didn’t engage in income-producing activity. Unearned income also includes Conservation Reserve Program payments and nontaxable foreign income.

Other Requirements

In addition to having taxable compensation, you must be under age 70 1/2 to open a traditional tax-deferred IRA. You can open a tax-free Roth IRA at any age, but your earned income must be less than $120,000 if you are single, and less than $179,000 if you are married filing jointly. The Roth earned income limit is only $10,000 if you are married filing separately and you lived with your spouse for any part of that tax year. Once you open your IRA, you can start paying contributions to your account at any time by sending cash, checks or money orders to the bank, brokerage or other fiduciary administering your IRA.

Spousal Compensation

If you are married and both you and your spouse had compensation, and both of you are under age 70 ½, each of you can open a traditional IRA. Husband and wife cannot participate in the same IRA. If you are married filing jointly and only one of you had compensation, both of you still can open an IRA. Each spouse in a married couple filing jointly can contribute up to $5,000 to their respective IRA. If the couple are contributing to Roth IRAs, their combined income must be less than $179,000. If you or your spouse contribute less than the maximum for the year, you can’t make up the difference after the due date of your tax return for that year