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IRA Contribution Rules When You Have No Income

No matter if you’re unemployed, taking a sabbatical, caring for a child or loved one at home, or not working for any other reason, don't miss out on the opportunity to max out a retirement account and build a nest egg.

By
Laura Adams, MBA
5-minute read
Episode #678
The Quick And Dirty

You typically must have earned income to contribute to an IRA. But for married couples, there's an exception known as a spousal IRA. It’s not a joint account but allows a working spouse to fund an IRA for a nonworking spouse up to the annual limit. You can make one or multiple IRA contributions at any time during the year. You can even split contributions between accounts, such as $3,000 to a traditional IRA and $3,000 to a Roth IRA. However, your joint income must be within limits to qualify for a Roth IRA. There are no income limits to be eligible for a traditional IRA.

If you regularly listen to the Money Girl podcast or read my transcripts, you know that I’m a huge fan of retirement accounts. There are different types of accounts you may qualify for depending on where you work, whether you have self-employment income, and how much you earn.

If you’ve assumed that you can only contribute to a retirement account if you work for a big company or have a cushy job, that’s dead wrong! Don’t miss the opportunity to save efficiently by using one or more tax-advantaged retirement accounts.

If you’ve assumed that you can only contribute to a retirement account if you work for a big company or have a cushy job, that’s dead wrong!

This post will explain the rules for using an IRA when you have no income. Maybe you’re unemployed, taking a sabbatical, caring for a child or loved one at home, or not working for any other reason. You may be surprised by the flexibility an IRA offers even when you don’t earn money for a short or long period.

What is an IRA?

Let’s start with a primer on IRAs or Individual Retirement Accounts. A fundamental concept to understand about an IRA (or any retirement account, for that matter) is that the account isn’t an investment. A retirement account is like your house or apartment—it’s a shelter that protects you. Similarly, a retirement account is a shelter that protects investments you own inside the account, such as stocks, bonds, exchange-traded funds (ETFs), mutual funds, and CDs.

A traditional IRA is available to anyone who has some amount of earned income from a job, business, or even from your spouse if you don't work and you file taxes jointly. More about the spousal IRA in a moment.

For 2021, you can contribute an amount equal to your earned income up to $6,000. However, if you’re over age 50, you can make an additional “catch up” contribution of $1,000, for a total of $7,000.

To keep learning about the power of retirement accounts, check out 4 Penalty-Free Ways to Use a Roth IRA Before Retirement.

What are the benefits of a traditional IRA?

Starting in 2020, there’s no age limit for making contributions to a traditional IRA.  Note that in previous years, the rule was that you couldn’t contribute after age 70 ½. Now, you can contribute to a traditional IRA regardless of your age, as long as you have an equal amount of earned income for the year. If you, or a spouse, don’t have a retirement plan at work, such as a 401(k) or 403(b), your traditional IRA contributions are fully tax-deductible. You don't pay tax on contributions or the account's investment earnings until you withdraw money in retirement.

For example, if you’re 30 years old, earn $45,000, and file taxes as a single person, you can max a traditional IRA by contributing $6,000. That allows you to pay tax on $39,000 of income, not on $45,000.

Every dollar that you contribute to a traditional IRA reduces your taxable income for the year.

Every dollar that you contribute to a traditional IRA reduces your taxable income for the year. If you or a spouse have a retirement plan at work, you can still max out a traditional IRA in the same year. However, some or all of your contributions may not be tax-deductible depending on your income.

You can take penalty-free distributions from a traditional IRA after age 59½. And you must make required minimum distributions (RMDs) after age 72. If you take money out of a traditional IRA before age 59½, in most cases, you’ll have to pay income tax plus a 10% early withdrawal penalty on the amount.

What are the benefits of a Roth IRA?

Another popular retirement account is a Roth IRA. Like a traditional account, a Roth IRA is available if you have earned income from a job, business, or a spouse if you’re married and file taxes jointly.

A Roth IRA has the same contribution limits as a traditional IRA. It also has no age deadline for making contributions. However, unlike a traditional IRA, with a Roth IRA, you never have RMDs, which means your money can stay in the account indefinitely.

Your contributions to a Roth IRA are not tax-deductible and don’t offer an upfront tax benefit. Using my previous example, if you’re 30 years old, earn $45,000, and contribute $6,000 to a Roth IRA, you’d pay tax on $45,000.

With a Roth IRA, your investments are allowed to grow completely tax-free, which is a huge deal.

The benefit of a Roth IRA comes in the future when you make withdrawals because you won’t owe one penny of taxes! You don’t even pay taxes on growth in the account that may have accumulated for decades. With a Roth IRA, your investments are allowed to grow completely tax-free, which is a huge deal.

Another significant benefit of a Roth IRA is that there isn’t a conflict with you or a spouse participating in a retirement plan at work. The only downside is that you can’t contribute to a Roth IRA when you’re a high-earner and exceed annual income thresholds.

There's more than one way to manage an IRA! Check out: What Is a Backdoor Roth IRA?

Having an IRA when you have no income: the spousal IRA

As I previously mentioned, you typically must have earned income to contribute to an IRA. But for married couples, there's an exception known as a spousal IRA. It’s not a joint account but allows a working spouse to fund an IRA for a nonworking spouse up to the annual limit. It’s a terrific way to build security for a spouse without their own income.

A spousal IRA is not a joint account but allows a working spouse to fund an IRA for a nonworking spouse up to the annual limit.

For example, if Terry and Cathy are newlyweds in their 30s and one gets laid off, they could put $6,000 each of their IRAs, for a total of $12,000 invested. As long as one spouse earns enough to cover both spouses’ contributions, they can fund their own IRA and the spouse’s account.

You can make one or multiple IRA contributions at any time during the year. You can even split contributions between accounts, such as $3,000 to a traditional IRA and $3,000 to a Roth IRA. However, your joint income must be within limits to qualify for a Roth IRA. There are no income limits to be eligible for a traditional IRA.

You have until your tax filing due date to fund an IRA for the prior year. For instance, if you open an IRA by May 17, 2021, you can fund a traditional or Roth IRA for 2020.

So, if you qualify for a spousal IRA, why not max it out and boost your savings? If you can afford to fund two IRAs on one spouse’s income, it’s an excellent way to meet your retirement goals and cut your tax bill at the same time.

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 frequent, trusted source for the national media. Money-Smart Solopreneur: A Personal Finance System for Freelancers, Entrepreneurs, and Side-Hustlers is her newest title. Laura's previous 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.