Can You Make a Roth IRA Contribution If You Have No Earned Income?
Roth individual retirement plans let you put in after-tax dollars and, at retirement, take out the contributions and the earnings tax-free. Just because you're interested in the tax benefits doesn't mean you're eligible to contribute, though. It is possible to add to a Roth IRA without earned income, but if you put money in when you're not eligible, you'll owe excess contribution penalties.
You must have compensation such as wages, salaries and net-self-employment income during the year in which you make your Roth IRA contribution. If you don't have earned income, you're going to need to find a different way to meet the compensation requirement. Your contribution limit equals the smaller of your compensation or the annual limit. As of 2012, the annual limit is $6,000 if you're 50 or older or $5,000 if you're still under 50.
Alimony Counts, Too
Alimony isn't earned income, but it does count as compensation to allow you to contribute to a Roth IRA, nonetheless. To qualify, your alimony must be taxable income received because of a divorce decree or separate maintenance. Child support is different from alimony and doesn't count towards making an IRA contribution.
Shared Spousal Compensation
If you're married and file a joint return, you can still contribute to your Roth IRA if your spouse has extra compensation. "Extra" means the amount of compensation your spouse has minus any IRA contributions your spouse makes. For example, if your spouse has $50,000 of compensation and makes a $6,000 IRA contribution, that leaves $44,000 of compensation -- more than enough to make another full Roth IRA contribution for you. This special treatment only applies if you're married and file a joint return, however.
If you can work around the no earned income issue, there may be limits on contributing to your Roth IRA if your modified adjusted gross income rises above the annual limits. Your MAGI includes not only earned income, but all other taxable income, such as capital gains, dividends and interest income. The MAGI limits are not all-or-nothing limits. Instead, they include phaseout ranges and if your MAGI falls within the range, your contribution is reduced. The closer your MAGI falls to the upper limit, the lower your reduced contribution limit. For example, in 2012, you can't contribute anything to your Roth IRA if you're single and your MAGI is more than $125,000. If your MAGI falls between $110,000 and $125,000, your contribution is reduced. For joint filers in 2012, the phaseout range is between $173,000,000 and $183,000. If you're married but file jointly, you can make a reduced contribution if your MAGI falls below $10,000, but you can't make a full contribution.
Based in the Kansas City area, Mike specializes in personal finance and business topics. He has been writing since 2009 and has been published by "Quicken," "TurboTax," and "The Motley Fool."