If you’re astute, you already know that one of the main requirements for making contributions to an IRA is that you must have earned income. For most folks, that means you have a job… but it doesn’t have to. Here are four ways that you can have “earned income” without a job – plus a few ways to make contributions without having paid ordinary income tax on the wages. These exceptions are for either kind of IRA: traditional or Roth.
Four Ways to Contribute to an IRA Without a Job
- If your income is solely from exercising non-qualified stock options. When you exercise a non-qualified stock option, the taxable component of the option exercise is considered taxable income, and therefore is eligible for contribution to an IRA.
- Alimony. If you receive alimony, it is taxable as ordinary income, which is eligible for IRA contribution.
- Scholarships and Fellowships – if these are taxable, reported in box 1 of a W2 form, they’re eligible for contribution to an IRA.
- Spousal contribution. If your spouse has earned income (and you have none or not enough to make a maximum contribution), you are eligible to make an IRA contribution based on your spouse’s income. The limit is that the total of all IRA contributions (yours and your spouse’s) cannot exceed the earned income of the working spouse.
A Few Ways to Make Contributions Without Paying Tax on the Income
- Non-taxable combat pay, reported in box 12 of your W2 form, is also eligible for contribution to an IRA.
- Exempt students, with a part-time job at the school (for example) can make IRA contributions.
- If your income is less than your exemption and deductions, effectively you are not paying tax on the earnings – but the IRA contribution is based upon MAGI, so you can still make an IRA contribution with the non-taxed funds.
Although these factors can be considered fairly trivial – the fact remains that they are exceptions to the general rule, so I thought it was important to note them for anyone who might be interested.
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