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Can You Make an IRA Contribution Without Earned Income?

Estimated reading time: 1 minutes, 55 seconds

Most know you aren’t allowed to contribute to an Individual Retirement Account (IRA) without earned income. Without taxable compensation, you lose eligibility for a direct IRA contribution. So what is the recourse for those on disability, the unemployed, or the stay-at-home parents? Are they completely out of luck when it comes to retirement savings? Not necessarily.

An IRA holder with a working spouse may be able to utilize spousal contribution rules for an IRA contribution.

IRA contribution

Qualified compensation may take several forms. Wages, salaries, tips, professional fees, bonuses, commissions, self-employment income, and alimony are chief among them. However, income from rental property, interest, dividends, pensions, and annuities does not count as compensation when it comes to IRAs. See Publication 590-A for more information on qualifying compensation.

You may open and contribute to an IRA if you (or, if you file a joint return, your spouse) received taxable compensation during the year. Unless you’re over the age of 70 ½, those contributions could be to a Traditional IRA. For a Roth IRA, the age limit does not apply.

So, if you’re married and file a joint tax return, you can take advantage of spousal contribution rules. These rules allow the income-earning individual to fund his or her spouse’s IRA even if the spouse has little to no qualifying income. Keep in mind those married but filing separately would not qualify for the rule.

The income-earning spouse can contribute up to current limits for both his or her IRA and that of his or her spouse. Higher-compensated spouses can even contribute to their spouses’ IRAs when the latter makes less than the annual limit. Once again, see Publication 590-A (specifically Page 9) for more information.

For example, for Tax Year 2018, an income-earning spouse, Diane, can contribute up to $5,500 (or $6,500 if the account holder is over 50) to both her IRA and the IRA of her spouse, Jason, who does not have qualifying income for Tax Year 2018. Even though Jason has trouble finding employment, the couple doesn’t necessarily have to pause funding his retirement as a result.

The bottom line is this might be an option even if you’re unable to contribute to your IRA yourself.

If you believe your IRA might benefit from spousal contributions, discuss with your team of professionals. Be sure to discuss eligibility, deductibility, and contribution limits when you do.

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