Earned income isn't always a requirement

Quick Summary

  • You can contribute to a Roth IRA if you have “earned income” and meet the income limits.
  • Even if you don’t get a W-2, you may still be able to contribute to a Roth IRA.
  • Spousal IRAs allow non-working spouses to open and contribute to a Roth IRA.

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 to make Roth IRA contributions. But what if you aren’t punching a time clock every day?

The good news is that you don’t need a formal job to contribute to a Roth IRA. In general, you get earned income when you work for someone else who pays you, or you own or run a business or farm.

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. Earned income includes wages, salaries, tips, bonuses, commissions, and self-employment income.

Here are five situations where you can still contribute to your Roth IRA.

If You’re Self-Employed

You don’t have to work for a company and receive a W-2 form. If you’re self-employed, you’re eligible. Of course, you have to first report that income on your tax return. No cheating.

If You Excercise Stock Options

If 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.

If You’re Awarded a Scholarships 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 Roth IRA contributions.

If You’re Married

If your spouse earns income but you don’t, the IRS allows you to have an IRA of your own. You’ll use family funds to make your annual contributions. Often called a spousal IRA, these accounts come with all the same rules as a normal Roth IRA. The only difference is that your spouse’s income is used to qualify for the IRA, rather than your own.

Families often use the spousal IRA to double the amount they can contribute to IRAs each year. But be careful. You can only contribute a certain amount per year without facing a penalty. 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 catch-up contributions.

Important: You can’t contribute more than your modified adjusted gross income. In the case of spousal IRAs, the working spouse must make enough money to cover both contributions. 

Also, to make contributions in the name of your spouse you must file your taxes as “married filing jointly.” If the nonworking spouse later goes back to work, he or she can still contribute to an existing spousal IRA. Once the account is set up, it’s an IRA just like any other.

Contributions Without Taxes

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. If you’re an exempt student with a part-time job, you may qualify for contributions.

Consult a Professional

Yes, IRAs are generally reserved for people earning income, but there are some cases in which no income doesn’t mean no IRA. As with any tax-related questions, sometimes individual situations can make a big difference. Check with a tax expert before making contributions.

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