The short answer:

No, unfortunately, you cannot use Social Security Income or Pension Income to make a Roth IRA or Traditional IRA contribution.

The more detailed explanation:

The IRS only allows you to contribute to a Traditional or Roth IRA using “earned” income.

What is Earned Income?

According to the IRS, “earned income includes all the taxable income and wages you get from working or from certain disability payments.” So, there are two ways to get earned income. Either you work for someone who pays you, or you own or run a business or farm.

Taxable earned income includes:

• Wages, salaries, tips, and other taxable employee pay;
• Union strike benefits;
• Long-term disability benefits received prior to minimum retirement age;
• Net earnings from self-employment if:
  • You own or operate a business or a farm or
  • You are a minister or member of a religious order (consult the IRS for Special Rules);
  • You are a statutory employee and have income.

• Nontaxable Combat Payelection. You can elect to have your nontaxable combat pay included in earned income for EITC. (See Publication 3. Armed Forces Tax Guide, for more information.)

 Examples of Income that are not considered “Earned Income”:

• Interest and dividends
• Retirement income
• Social security
• Unemployment benefits
• Alimony
• Child support
• Pay received for work while an inmate in a penal institution

A Potential Loophole: the Spousal IRA exception

This allows a working spouse to contribute to an IRA on behalf of a non-working spouse, as long as the working spouse has enough income to make the contribution and the couple is married, filing jointly.

 

If you have any questions on the best Roth IRA strategies in planning for retirement, feel free to contact us; or feel free to schedule some time to talk using our online appointment calendar.