Can I Contribute to My Roth IRA If I Don't Work?

Even entry-level retirement planners understand the power of saving for retirement in an IRA. Because contributions lower your taxable income on a dollar-for-dollar basis, you essentially defer taxation on the portion you invest until you access it in retirement. While individual retirement accounts are powerful tools for investors while they’re in the workforce, their approach to retirement planning and savings changes if they’re unemployed or retired.

Traditional IRA Contribution Rules

Because IRAs’ tax benefits come from reductions in earned income, an investor must be making earned income – not passive, investment-related profits – to be eligible to contribute to an IRA. Additionally, investors may no longer make contributions to a traditional IRA once they turn 70 1/2, regardless of their employment situation. Investors who receive earned income may only contribute $5,000 annually, or $6,000 if they are older than 50. Finally, individual filers who earn more than $125,000 and married couples with income that surpasses $183,000 can’t claim the tax deduction for contributing to IRAs.

Working Spouse Exception

If a married couple files jointly, the IRS relaxes some of the contribution rules. An investor who is unemployed or retired for the entire tax year may still make a contribution to his traditional IRA if his spouse works and receives earned income. The non-working spouse may make contributions to his IRA using money his spouse earned. This exception allows spouses to continue to save for retirement if one has already retired or involuntarily left the workforce. The other rules that govern contributions to IRA, including age limits and maximum contributions, still apply.

Working Part-Time in Retirement

Some retirees continue to work at a second job after they leave their career, partially to continue to receive earned income and remain eligible to make contributions to a traditional IRA. While this strategy can work an investor can’t contribute more than she earns in a year to an IRA. Because of this, retirees should plan to earn at least $500 each month if they wish to make a $6,000 contribution to an IRA.

Alternatives

Because of the preferential tax treatment the IRS grants IRAs, that type of retirement account is much more regulated than other investment products. Investors with no earned income in a year may consider shifting their retirement planning to place money in other types of investments. While they don’t receive preferential tax treatment, retirees with passive income can reinvest it in tax-managed mutual funds, exchange-traded funds, annuities or other investments to continue building savings for retirement.