Can I Invest in a Roth With Just Dividend Income?

Roth IRAs hold several advantages over traditional IRAs. However, both types of IRAs require earned income for contribution eligibility, so if your earnings are strictly from dividend income you cannot invest in a Roth IRA. If you and your spouse file jointly and one of you has earned income, you can both contribute to Roth IRAs, as long as you meet the annual income limitations. For IRA purposes, earned income includes wages, salary, tips, commissions and bonuses.

Roth IRA

According to the Internal Revenue Service, you can contribute to a Roth IRA if you have taxable compensation and your modified adjusted gross income falls within certain limits. Even if your AGI is above the limit, you might be able to convert holdings from a traditional IRA, self-employment plan IRA or amounts from either a traditional, Simple Employee Pension IRA or Savings Incentive Match Plan for Employees IRA into a Roth IRA. If you have a qualified employer-sponsored retirement plan such as a 401(k) from a previous employer, you may roll it over into a Roth IRA. Converting other retirement accounts to your Roth IRA means paying taxes on the converted amount but could prove worthwhile in the long run. Consult your financial adviser to determine whether converting other retirement assets to a Roth IRA makes sense for you.

Features

Contributions to Roth IRAs are not tax-deductible, but because you fund your Roth IRA with money that has already been taxed, your subsequent withdrawals in retirement are tax-free. Your Roth IRA account balance also accumulates without being subject to tax. Traditional IRAs and 401(k)s, funded with pretax money, are tax-deferred, and you pay tax on withdrawals in retirement.

Income Limitations

Like a traditional IRA, you can contribute up to $5,000 annually into a Roth IRA, and up to $6,000 annually once you are past 50. As of 2012, the AGI limits for Roth IRA contributions for single filers were $110,000 for a full contribution and up to $125,000 for a partial contribution. If your AGI exceeded $125,000 as a single filer you could not make a Roth IRA contribution. If you were married and filing jointly as of 2012, you could make a full contribution on an AGI of up to $173,000, a partial contribution up to $183,000 and no contribution if your income exceeded $183,000.

Advantages

If you own a traditional IRA, you must begin making withdrawals by the age of 70 1/2. Not only is there no mandatory age for taking distributions in a Roth IRA, but you don't ever have to take them. If you want, you can leave your Roth IRA in its entirety to your heirs. You can also continue to contribute to a Roth IRA after reaching the age of 70 1/2, as long as you have earned income and meet the AGI limits. With a traditional IRA, you can't make contributions past that age whether or not you are still working.

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About the Author

Jane Meggitt has been a writer for more than 20 years. In addition to reporting for a major newspaper chain, she has been published in "Horse News," "Suburban Classic," "Hoof Beats," "Equine Journal" and other publications. She has a Bachelor of Arts in English from New York University and an Associate of Arts from the American Academy of Dramatics Arts, New York City.

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