When Congress legislated the IRA in 1974, it intended the accounts for workers not covered by an employer's retirement plan. While you must have what the IRS calls "taxable compensation" to contribute to both traditional and Roth IRAs, not many factors, including those pertaining to employment status and terms, preclude you from simply enrolling in either type of account.
Anybody can open a Roth IRA. To contribute, however, you must have taxable compensation and fall under IRS limits for modified adjusted gross income. Consult your tax adviser or refer to IRS Publication 590 for the most recent caps, as they can and do change frequently. Like with a Roth, you must have taxable compensation to contribute to a traditional IRA. One key eligibility distinction exists between the two types of IRAs. The IRS does not allow you to open a traditional account in the year that you turn age 70 1/2 or any subsequent year.
Traditional IRA Restrictions
If you have taxable compensation you may qualify to contribute to a traditional IRA. Generally, this means that you must hold some form of employment, however, this is not always the case. You can contribute to a traditional IRA even if you and/or your spouse also contributes to a workplace retirement plan. Several factors impact the amount of your contribution you can deduct, including who (you or your spouse) is covered by a workplace plan, your filing status and your modified adjusted gross income. Refer to Publication 590 to see if contribution limits apply in your case.
Roth IRA Restrictions
Employed or not, you can have an open Roth IRA. You cannot make contributions to a Roth, however, if you do not have taxable compensation. Furthermore, your modified adjusted gross income must fall under a certain amount. As of the time of publication, IRS Publication 590 notes, for example, that those who use married filed jointly status must have modified adjusted gross income below $177,000, while single filers must come in under $120,000.
As IRS Publication 590 states, "Generally, compensation is what you earn from working." This includes wages and salaries, commission, tips, self-employment income and alimony. It does not include investment income, such as interest and dividends, capital gains from property ownership, pension and annuity income and deferred compensation.
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