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Townhall
Finance...
Retirement
Without Work
By Carrie Schwab Pomerantz
7/5/11
Dear
Carrie: Can you put money in an
IRA or a Roth IRA if you don’t have wage income? -- A Reader
Dear
Reader: Individual Retirement
Accounts (IRAs) were introduced in the mid-70s to help employees save
for
retirement and reduce their taxable income. So, it stands to reason
that to
make a contribution -- and get the tax benefit -- you’d need to have
income
from a job.
And
in fact, contributions to both
traditional and Roth IRAs can only be made from what the IRS determines
to be
“earned income.” However, wages aren’t the only form of earned income.
Let’s
start by looking at the definition.
WHAT’S
CONSIDERED EARNED INCOME
You
don’t have to work for someone
else to have taxable earned income. You can also work for yourself.
Compensation from either type of employment would be considered earned
income.
But the complete definition is a bit broader. According to the IRS,
taxable
earned income includes:
--
Wages, salaries and tips.
--
Union strike benefits.
--
Long-term disability benefits
received prior to minimum retirement age.
--
Net earnings from self-employment.
In
terms of an IRA contribution, the
amount of your earned income is also important. The maximum
contribution you
can make for 2011 is $5,000 ($6,000 if you’re over 50). But if your
taxable
income is less than the maximum contribution, you can only contribute
up to the
actual dollar amount of your earned income for the year. In other
words, you
can’t contribute more to your IRA than you earn.
WHAT
ABOUT UNEARNED INCOME
Because
there are other ways to make
money, it’s probably equally important to understand what’s not
considered to
be earned income. Things such as interest and dividends from
investments,
pensions, Social Security benefits, unemployment benefits, alimony and
child
support -- even though they may factor significantly in your monthly
bottom
line -- aren’t considered earned income for tax and IRA contribution
purposes.
THE
SPOUSAL IRA EXCEPTION
Fortunately
for married couples, there
is one way to make a contribution to an IRA if you don’t have wages --
a
Spousal IRA. This is a tax-advantaged retirement account designed
specifically
to allow a working spouse to make contributions on behalf of a
nonworking
spouse. Under current laws, if you’re married filing jointly, you can
contribute the maximum into an IRA for each spouse -- even if one of
you has no
earned income -- as long as the working spouse has income equal to both
contributions.
So,
let’s say both you and your spouse
are over 50 and want to contribute the maximum of $6,000 to each of
your IRAs.
Whichever one of you is working would need to have earned an income of
$12,000
or more to cover both contributions.
Another
good thing about the Spousal
IRA is that should the nonworking spouse go back to work, he or she can
contribute to the same IRA. That’s because, once opened, a Spousal IRA
is an
Individual Retirement Account like any other
MAKING
RETIREMENT A TOP PRIORITY, NO
MATTER WHAT
Even
if you don’t qualify for the tax
advantages of an IRA or another type of retirement account, if you have
income
from other sources besides wages, I advise you to save for retirement
-- and
save consistently. Open an investment account or another type of
savings
account, earmark it for retirement and direct a percentage of your
income to
that account each month.
Ideally,
you could set up an automatic
transfer from your checking account into your savings account to make
it easier
on yourself. Then if your earnings situation changes and you find
you’re able
to contribute to an IRA or participate in an employer-sponsored plan,
you’ll be
ahead of the game.
Read
it at Townhall Finance
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