You Need Earned Income for an IRA


You Need Earned Income for an IRA

If your only source of income is unemployment compensation, you can't contribute to an IRA.

I only received unemployment compensation through the state in 2007. Does that qualify as earned income for an IRA?

"The answer is no," says IRA expert Ed Slott, author of Your Complete Retirement Planning Road Map. Unemployment insurance doesn't count as earned income for IRA eligibility.

It's a good question, though -- so good that Congress didn't consider it when writing the original tax rules, says Slott. But it was ruled on years later in the tax regulations and in a tax court case, which clarified that unemployment compensation doesn't count for IRA eligibility.

Because you can only contribute up to the amount of your earned income, you won't be able to make any IRA contributions for 2007.

There is an exception, however. If you have a spouse who had earned income in 2007, then she can contribute to an IRA on your behalf. She'll need to make the 2007 contribution by April 15, 2008.

For more information about the rules for spousal IRAs, see How a Spousal IRA Works. For more information about IRAs, see Everything You Need to Know About IRAs.

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