The IRS gets a little grumpy if you contribute to a Roth IRA without what it calls earned income. That usually means that you need a paying job—working for either someone else or your own business—to make Roth IRA contributions. But what if you don’t have one—a job, that is—and you still want a Roth?
Even if you don’t have a conventional job, you may be able to contribute to a Roth IRA.
The Good News
Although it’s not true in all cases, if you’re paying taxes on any type of income from working, then there’s a good chance that 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 that you might not immediately think of as “earned.”
Here are some examples of ways that you might fund a Roth without having a traditional 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 a Roth IRA.
If You’re Awarded a Scholarship or Fellowship
Some scholarships and fellowships are taxable—especially those that pay for room and board, teaching, or research, or that include a stipend for living expenses. What’s important is that you’re paying income taxes on these funds. IRS Publication 970: Tax Benefits for Education covers this in detail. When you pay these taxes, 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.
Families often use the spousal IRA to double the amount that they can contribute to IRAs each year. For tax years 2021 and 2022, you can contribute up to $6,000 per person. If you’re age 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, to qualify for a spousal IRA, 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
You have until the filing deadline of the following year to contribute to an IRA. In 2022, you have until April 18 in most states to make a contribution for the 2021 tax year. Taxpayers in Maine and Massachusetts have until April 19.
Can a Stay-at-Home Parent Have a Roth IRA?
A stay-at-home parent who has no income of their own can still have a Roth IRA. This so-called spousal IRA is just like any other Roth IRA, except that your spouse’s income is used to determine whether you qualify for a Roth IRA based on the maximum income limits.
In 2021, if your tax filing status is married filing jointly, then you can contribute the full amount ($6,000, or $7,000 if you’re age 50 or older) if your MAGI is less than $198,000, a reduced amount if you make $198,000 to $208,000, or nothing at all if your income is over $208,000.
In 2022, if your tax filing status is married filing jointly, you can still contribute the full amount ($6,000, or $7,000 if you’re age 50 or older) if your MAGI is less than $204,000, a reduced amount if you make $204,000 to $214,000, or nothing at all if your income is over $214,000.
What Is Considered Earned Income?
Earned income includes wages, salary, commissions, tips, bonuses, self-employment income, taxable non-tuition, stipend payments, and nontaxable combat pay. Taxable alimony and separate maintenance payments for divorce or separation decrees that were executed on or before Dec. 31, 2018, are also considered earned income by the IRS.
What Is Not Considered Earned Income?
Various types of income are not considered earned income for the purposes of contributing to a Roth IRA. These include interest and dividends, pensions or annuities, and Social Security or unemployment benefits.
The Bottom Line
Even if you don’t have a conventional job, you may be able to contribute to a Roth IRA with income earned from unconventional sources—if you don’t earn more than the income limits imposed by the IRS. As with any tax-related questions, individual situations can sometimes make a big difference so it can be a good idea to check with a tax expert before making contributions.