The internal Revenue Service (IRS) gets a little grumpy if you contribute to a Roth individual retirement account (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—a job, that is—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
You don’t necessarily need a formal job to contribute to a Roth IRA. Although it's not true in all cases, if you’re paying taxes on any type of income from working, there’s a good chance you can make Roth IRA contributions. Although 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."
You may contribute to a Roth IRA even if you don't have a formal job.
Here are some examples of ways you might fund a Roth without having a formal job or steady pay.
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. You may contribute this taxable income to Roth IRAs.
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.
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 than 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. For tax years 2020 and 2021, you can contribute up to $6,000 per person. If you’re aged 50 or older, the limit is $7,000. That means couples can collectively contribute $12,000 to $14,000, depending on whether either or both are eligible for the 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.
If You Receive Nontaxable Combat Pay
Consult a Tax Professional
Although IRAs are generally reserved for people earning a traditional income, there are some cases in which no income doesn’t necessarily 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.