IRA Contribution Rules When You Have No Income

Learn how a spousal IRA helps grow a nest egg even with no income.

Laura Adams, MBA
4-minute read
Episode #225

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When you don’t have income, you generally aren’t allowed to contribute to an Individual Retirement Arrangement or IRA. However, there is one special situation in which you can still sock away money in a traditional or a Roth IRA, even if you don’t earn a dime. I’ll tell you about this exception to the rule so you don’t miss out on the opportunity to super-size your retirement nest egg.

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Who Can Contribute to an IRA?

Who can contribute to an IRA? Here’s the rule: you must have taxable compensation, like a salary, wages, commissions, tips, bonuses, net income from self-employment, or alimony. However, certain types of income don’t count as compensation when it comes to an IRA, like rental income, investment income, or amounts received from a pension or annuity.

Anyone up to age 70½ with qualified income can have a traditional IRA, even a minor. And by the way, an IRA has no connection to your work. You own an IRA as an individual and it can never be owned jointly, even if you’re married.

How Much Can You Contribute to an IRA?

For 2011 you can contribute an amount to an IRA that’s equal to your qualified compensation, up to a maximum of $5,000 (or $6,000 if you’re age 50 or older). For example, if you’re a student who earns $2,000 working a summer job, you could contribute $2,000 to either a traditional or a Roth IRA. But if you’re a 40-year-old executive who earns $100,000, you can contribute no more than $5,000.

What is a Spousal IRA?

So what happens if you lose your job, can’t work due to an injury, or decide to stay home to take care of your kids? As I mentioned, you can’t contribute to an IRA without having your own qualifying income. But here’s the kicker: If you’re married and file a joint tax return, you can take advantage of a spousal IRA as long as one of you works. A spousal IRA isn’t a different type of IRA, it’s just a name for the rule that allows a breadwinner with qualifying income to fund their spouse’s IRA even if the spouse has little or no income. But you have to file taxes jointly as a couple to qualify—the rule doesn’t apply if you’re married and file separately.

For a qualifying couple, a nonworking spouse can also make IRA contributions up to $5,000 for 2011 (or up to $6,000 if you’re age 50 or older). That means the total combined IRA contributions that a married couple can make for 2011 is $10,000 if both spouses are younger than age 50. Or it’s $11,000 if one spouse is 50 or older or $12,000 if both spouses are 50 or older.

Example of a Spousal IRA Contribution

A spousal IRA allows a breadwinner with qualifying income to fund their spouse’s IRA even if the spouse has little or no income.

Let’s say Dave and Cathy are newlyweds in their 30s who relocated to Florida at the end of 2010 so Cathy could take a better job. But Dave has trouble finding work and stays unemployed for all of 2011. Cathy won’t be eligible to participate in her new company’s 401(k) retirement plan until 2012, but she and Dave still want to save for retirement in the meantime.

Since Dave and Cathy are married and plan to file a joint tax return, each of them can fully fund their traditional or Roth IRA for 2011. As a couple, they can squirrel away $5,000 in Cathy’s IRA and $5,000 in Dave’s IRA—even though Dave doesn’t have any income of his own. It wouldn’t be possible for Dave to fund an IRA while he’s unemployed if he and Cathy lived together without being married.

Who Can Fund an IRA?

Here’s a quick and dirty tip about funding an IRA: Just because you’re qualified to contribute to an IRA doesn’t mean that the money has to come from your bank account. As long as you’re eligible for an IRA contribution, the money could come from another source, like a gift from a relative or a home equity line of credit. For example, if you have a teenager who earns $3,000 working part time and then spends it all, you or someone else (like a grandparent) could contribute $3,000 to their IRA on their behalf.

An IRA is a great way to meet your retirement goals and cut your tax bill at the same time. So don’t miss out on funding one even if you’re not working. To find out more about whether a traditional or a Roth IRA is right for you be sure to read my previous post, What Is the Difference Between a Traditional and Roth IRA?.

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More Resources:
IRS Publication 590: Individual Retirement Arrangements

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About the Author

Laura Adams, MBA

Laura Adams received an MBA from the University of Florida. She's an award-winning personal finance author, speaker, and consumer advocate who is a trusted and frequent source for the national media. Her book, Debt-Free Blueprint: How to Get Out of Debt and Build a Financial Life You Love was an Amazon #1 New Release. Do you have a money question? Call the Money Girl listener line at 302-364-0308. Your question could be featured on the show. 

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