Dear Carrie: Can you put money in an IRA or a Roth IRA if you don't have wage income? -- A Reader
Dear Reader: Individual Retirement Accounts (IRAs) were introduced in the mid-70s to help employees save for retirement and reduce their taxable income. So, it stands to reason that to make a contribution -- and get the tax benefit -- you'd need to have income from a job.
And in fact, contributions to both traditional and Roth IRAs can only be made from what the IRS determines to be "earned income." However, wages aren't the only form of earned income. Let's start by looking at the definition.
WHAT'S CONSIDERED EARNED INCOME
You don't have to work for someone else to have taxable earned income. You can also work for yourself. Compensation from either type of employment would be considered earned income. But the complete definition is a bit broader. According to the IRS, taxable earned income includes:
-- Wages, salaries and tips.
-- Union strike benefits.
-- Long-term disability benefits received prior to minimum retirement age.
-- Net earnings from self-employment.
In terms of an IRA contribution, the amount of your earned income is also important. The maximum contribution you can make for 2011 is $5,000 ($6,000 if you're over 50). But if your taxable income is less than the maximum contribution, you can only contribute up to the actual dollar amount of your earned income for the year. In other words, you can't contribute more to your IRA than you earn.
WHAT ABOUT UNEARNED INCOME
Because there are other ways to make money, it's probably equally important to understand what's not considered to be earned income. Things such as interest and dividends from investments, pensions, Social Security benefits, unemployment benefits, alimony and child support -- even though they may factor significantly in your monthly bottom line -- aren't considered earned income for tax and IRA contribution purposes.
THE SPOUSAL IRA EXCEPTION
Fortunately for married couples, there is one way to make a contribution to an IRA if you don't have wages -- a Spousal IRA. This is a tax-advantaged retirement account designed specifically to allow a working spouse to make contributions on behalf of a nonworking spouse. Under current laws, if you're married filing jointly, you can contribute the maximum into an IRA for each spouse -- even if one of you has no earned income -- as long as the working spouse has income equal to both contributions.
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