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What Is Considered Earned Income for IRA Contributions?

Byline profile imageEdited by Jeff White, CEPF®
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Understanding what qualifies as earned income for IRA contributions is essential for effective retirement planning. If you’re looking to build your nest egg through an Individual Retirement Account, knowing which types of income allow you to make contributions can help maximize your savings potential. Earned income typically includes wages, salaries, tips, professional fees, bonuses and other amounts you receive for providing personal services. However, not all money that comes your way counts toward your IRA contribution limit. Passive income sources like rental income, interest earnings, dividend payments and capital gains don’t qualify as earned income for IRA purposes. Here’s what else to consider.

A financial advisor can help you optimize your retirement savings and investments to minimize your tax liability.

Understanding the Basics of an Individual Retirement Account (IRA)

An Individual Retirement Account (IRA) is a tax-advantaged investment account designed to help you save for retirement. Unlike employer-sponsored plans such as 401(k)s, IRAs are typically opened by individuals through financial institutions like banks, brokerages, or robo-advisors. These accounts offer various tax benefits that can help your retirement savings grow more efficiently over time.

Traditional IRAs allow your investments to grow tax-deferred, meaning you don’t pay taxes on earnings until you withdraw funds in retirement. Contributions may be tax-deductible depending on your income and whether you have access to an employer retirement plan. Roth IRAs, meanwhile, are funded with after-tax dollars, but qualified withdrawals in retirement are completely tax-free.

The IRS limits how much you can contribute to an IRA each year. As of 2025, 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.

One advantage of understanding the basics of an Individual Retirement Account is appreciating its flexibility. IRAs typically offer a wide range of investment options, including stocks, bonds, mutual funds, ETFs, and sometimes alternative investments. This variety allows you to create a diversified portfolio aligned with your risk tolerance and retirement timeline.

What Is Considered Earned Income for IRA Contributions?

When planning for retirement with an Individual Retirement Account (IRA), knowing what qualifies as earned income for IRA contributions is essential. Earned income generally includes wages, salaries, tips, professional fees, bonuses, and other amounts you receive for providing personal services. The IRS specifically defines it as compensation you receive for active work, distinguishing it from passive income sources. Some examples of earned include:

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?

When planning for retirement through Individual Retirement Accounts (IRAs), knowing what qualifies as earned income is crucial. Earned income typically includes wages, salaries, tips, and self-employment earnings. However, many people are surprised to learn that several types of income don’t qualify for IRA contribution purposes. The IRS doesn’t allow you to include any of the following as earned income for IRA contributions:

In general, the IRS also excludes welfare benefits, unemployment compensation, workers’ 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

SmartAsset: What Is Considered Earned Income for IRA Contributions?

Aside from having earned income, you also have to be within certain income limits 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 $165,000 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 $246,000 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 $165,000. The phaseout threshold for married couples filing jointly and qualifying widow(er)s is $246,000. 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 do 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.

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 2025 (filed in 2026), a full deduction is allowed if you:

  • File single or head of household and your MAGI is $77,000 or less
  • Are married and file jointly with a MAGI of $123,000 or less
  • Are a qualifying widow(er) with a MAGI of $143,000 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

SmartAsset: What Is Considered Earned Income for IRA Contributions?

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 an online brokerage. 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

Knowing what qualifies as earned income for IRA contributions is essential for effective retirement planning. Remember that earned income includes wages, salaries, tips, bonuses, commissions, and self-employment income — all of which can help you build your retirement nest egg. However, passive income sources like rental income, interest, dividends and capital gains don’t count toward your IRA contribution limit.

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 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 maximize your returns over time.

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