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

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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 need 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. 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, alimony 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 need to have earned an income of $12,000 or more to cover both contributions.

Another good thing about the Spousal IRA is that should the nonworking 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 A TOP PRIORITY, NO MATTER WHAT

Even if you don't qualify for the tax advantages of an IRA or another 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 another 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 if your earnings situation changes 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.

Carrie Schwab-Pomerantz, CERTIFIED FINANCIAL PLANNER (tm) is president of the Charles Schwab Foundation and author of "It Pays to Talk." You can e-mail Carrie at askcarrie@schwab.com. This column is no substitute for an individualized recommendation, tax or personalized investment advice. To find out more about Carrie Schwab-Pomerantz and read features by other Creators Syndicate writers and cartoonists, visit the Creators Syndicate website at www.creators.com.

COPYRIGHT 2011 CHARLES SCHWAB & CO. INC. MEMBER SIPC

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Comments

2 Comments | Post Comment
Hello,
Thank you for the information on Roth IRAs. I have an additional question. I own an S-corp, and am technically not considered self-employed. I am the only "employee" of the S-corp however. The last few years I have not made enough money to take wages, although the business has made a modest amount of income. Do I need to give myself a W-2 in order to be able to invest in a Roth IRA?
Comment: #1
Posted by: Shelley Hussey
Wed May 15, 2013 9:24 AM
I had earned income, including w-2 income in 2013, but was laid off and have not worked since. Even though I do not have any income today (in 2014), can I make a tax deductible IRA contribution now, before 4/15/2014 that can be deducted from my 2013 income?
Comment: #2
Posted by: Ben Collins
Wed Mar 19, 2014 8:58 AM
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