What Is Considered Earned Income for IRA Contributions?

Opening an individual retirement accounts (IRA) can help you build wealth for the future while enjoying some tax breaks. One thing you’ll need to contribute to an IRA is earned income. The IRS defines what is considered earned income for IRA contributions, along with other guidelines for eligibility. A financial advisor can help you optimize your retirement savings and investments to minimize your tax liability.

IRA Basics

An IRA is a tax-advantaged retirement savings plan that’s distinct from workplace plans, such as a 401k or 457b. There are different types of IRAs, with the most common being traditional and Roth. A traditional IRA is funded with pre-tax dollars and can allow for deductible contributions. Roth IRAs are funded with after-tax dollars and allow you to withdraw money tax-free in retirement.

The IRS limits how much you can contribute to an IRA each year. As of 2024, the IRA contribution limit is $7,000. An additional catch-up contribution of $1,000 is allowed if you’re 50 or older. These limits apply to traditional and Roth IRAs.

Self-employed individuals and business owners have additional IRA options. For example, you might open a SEP IRA or Simplified Employee Pension for yourself if you’re an independent contractor or sole proprietor. If you run a small business with employees, you might opt for a SIMPLE IRA instead. These IRAs have different annual contribution limits.

While there are differences between traditional, Roth, SEP and SIMPLE IRAs, one thing holds true for all of them. You’ll need to have earned income in order to open and contribute to one of these accounts.

What Is Considered Earned Income for IRA Contributions?

Generally, earned income for IRA contributions is money earned from employment. Some examples of earned include:

Wages
Salaries
Tips
Other taxable employee compensation, like commissions or bonuses
Net earnings from self-employment

If you have any of these types of income for the year, then you could make contributions to an IRA. In certain cases, the IRS can also consider other types of compensation for IRA contributions. For example, if you’re receiving alimony or child support or aid related to graduate or postdoctoral studies, those might qualify as earned income.

What Is Not Considered Earned Income for IRA Contributions?

There are certain types of income you might receive that may be taxable, but not countable as earned income. The IRS doesn’t allow you to include any of the following as earned income for IRA contributions:

Rental property income
Interest income
Dividends
Pension income
Annuity income
Deferred compensation benefits

In general, the IRS also excludes welfare benefits, unemployment compensation, worker’s compensation benefits and Social Security benefits from earned income calculations. There is an exception for military members who receive excludable combat zone compensation. Those benefits can be counted as earned income.

Income Limits for Making Roth IRA Contributions

Aside from having earned income, you also have to be within certain income limits in order to contribute to a Roth IRA. Specifically, the IRS bases eligibility to make Roth IRA contributions on modified adjusted gross income (MAGI) and filing status. For 2024, you can make the full contribution to a Roth IRA if you:

Have a MAGI of less than $161,000 and file single, head of household or married filing separately and did not live with your spouse at any time during the year
Have a MAGI of less than $240,000 and are married filing jointly or a qualifying widow(er)

Your ability to contribute to a Roth IRA phases out once your income exceeds the allowed threshold for your filing status.

For example, you can’t contribute anything to a Roth IRA if you file single, head of household or married filing separately and didn’t live with your spouse if your MAGI is equal to or greater than $153,000. The phaseout threshold for married couples filing jointly and qualifying widow(er)s is $228,000. If you’re married, file separately, but live with your spouse you can only contribute a reduced amount if your MAGI is below $10,000.

Income Limits for Deducting Traditional IRA Contributions

Income isn’t a deciding factor for whether you can contribute to a traditional IRA. But your income and whether you’re covered by a retirement plan at work does determine how much of those contributions you can deduct.

If you’re not covered by a retirement plan at work, your contributions are not limited by income. So you can deduct any amount you contribute, up to the annual limit, regardless of how much you earn. There’s an exception, however, if your spouse is covered by a plan at their job.

In that case, you can deduct the full contribution for the 2023 tax year (filed in 2024) only if your modified AGI is $204,000 or less. The deduction phases out once your MAGI exceeds $214,000. This assumes you file a joint return. If you file separate returns, only a partial deduction is allowed if your MAGI is less than $10,000.

If you are covered by a retirement plan at work, your income directly affects how much of your traditional IRA contributions you can deduct. For 2024, a full deduction is allowed if you:

File single or head of household and your MAGI is $73,000 or less
Are married and file jointly with a MAGI of $136,000 or less
Are a qualifying widow(er) with a MAGI of $136,000 or less

Married couples who file separately are only allowed a partial deduction when MAGI is below $10,000.

How to Make IRA Contributions If You Have Earned Income

Once you determine what is earned income for IRA contributions and you verify that your income fits the IRS definition, you’re ready to start saving. If you don’t have an IRA already, you can open one through a brokerage online. This typically involves completing an application, verifying your identity and linking an external bank account to fund your IRA.

After your IRA is open, you can begin making contributions. This can be as simple as logging in to your brokerage account, choosing the investments you want to buy and selecting an amount to transfer from your linked bank account. You can make contributions at different times each month or schedule money to be transferred to your IRA automatically.

The most important thing to keep in mind is that you can only contribute amounts up to the allowed limit. Making excess contributions to an IRA can result in a tax penalty. So it’s a good idea to keep track of your contributions as you make them.

Bottom Line

Contributing to an IRA can help you to create a more secure retirement picture. You can save in an IRA in addition to the money you’re adding to a retirement plan at work or in place of a workplace plan if you don’t have one. The key is making sure you have earned income to satisfy IRS requirements.

Retirement Planning Tips

A financial advisor could help you create a retirement plan for your needs and goals. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
When opening a new IRA, take time to compare brokerage account options. Specifically, consider the range of investments that are available, the minimum amount required for those investments and the fees you might pay. Keeping your investment costs as low as possible can help with maximizing your returns over time.