The IRS gets a little grumpy if you contribute to a Roth IRA without what it calls earned income. That usually means you need a paying job—either working for someone else or for your own business—to make Roth IRA contributions. But what if you don't have one—and still want a Roth?
- You can contribute to a Roth IRA if you have earned income and meet the income limits.
- Even if you don’t have a conventional job, you may have income that qualifies as "earned."
- Spouses with no income can also contribute to Roth IRAs, using the other spouse's earned income.
The good news is that you don’t necessarily need a formal job to contribute to a Roth IRA. Although not true in all cases, if you’re paying taxes on any type of income from working, there’s a good chance that you can make Roth IRA contributions. While earned income typically includes wages, salaries, tips, bonuses, commissions, and self-employment income, it also includes some kinds of income you might not immediately think of as "earned."
Here are four examples:
1. If You Exercised Stock Options
When you exercise non-qualified stock options, you’ll probably pay income taxes on the difference between the grant price and the price at which you exercised the options. The taxable income counts toward Roth IRA contributions.
2. If You’re Awarded a Scholarship or Fellowship
Some scholarships and fellowships are taxable—especially those that pay for room and board, or that include a stipend for living expenses. IRS Publication 970 covers this in detail. But what’s important is that you’re paying income taxes on these funds. When you do so, you can usually use that income to justify a Roth IRA contribution.
3. If Your Spouse Has Earned Income
If your spouse earns income but you don’t, the IRS allows you to have an IRA of your own and use family funds to make your annual contributions. Often called a spousal IRA, these accounts act just like a normal Roth IRA. The only difference is that your spouse’s income, rather that your own, is used to determine whether you qualify for a Roth IRA, based on the maximum income limits.
If you're eligible for a spousal IRA, you can double your family's annual Roth IRA contributions.
Families often use the spousal IRA to double the amount they can contribute to IRAs each year. In 2019, you can contribute up to $6,000 per person. If you’re age 50 or over, the limit is $7,000. That means couples can (collectively) contribute $12,000 to $14000, depending on who’s eligible for the additional catch-up contributions.
Also, you must file your taxes as “married filing jointly.” If the no-income spouse later goes back to work, they can still contribute to their existing spousal IRA. Once the account is set up, it’s an IRA just like any other.
4. If You Receive Nontaxable Combat Pay
You don’t necessarily have to pay taxes to contribute to a Roth IRA. For instance, if you receive nontaxable combat pay, which is reported in box 12 of your W-2 form, you’re eligible.
Consult a Professional
Yes, IRAs are generally reserved for people earning a traditional income, but there are some cases in which no income doesn’t mean no IRA. As with any tax-related questions, individual situations can sometimes make a big difference. So it's best to check with a tax expert before making contributions.