Can I Contribute To A Roth IRA If I Only Have Unemployment Income?

This is a difficult question with no direct answer from the IRS.  Upon reviewing IRS Pub 590, it states "you can contribute to a Roth IRA if you have taxable compensation and your modified AGI is less than:

1. $179,000 MFJ
2. $122,000 Single, Head of Household or Married Filing Jointly and did not live with spouse
3. $10,000 Married Filing Jointly and lived with spouse

The key term above is taxable compensation.  IRS defines compensation as "Compensation includes wages, salaries, tips, professional fees, bonuses and other amounts received for providing personal services.  It also includes commissions, self-employment income, nontaxable combat pay, military differential pay, and taxable alimony and separate maintenance payments."  Further, it states compensation is what you earn from working.  Therefore, your Roth IRA is limited to $5,000 ($6,000 if 50 or older) or taxable compensation.  There is that word again!

So is Unemployment Income taxable compensation?  Yes, unemployment income is taxable income and it is included in your adjusted gross income, but it is not EARNED INCOME from working.

ANSWER - No, you cannot contribute to a Roth IRA if you only have unemployment income because the money is not earned income.

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Pursuant to applicable U.S. Treasury Regulations, we must advise you that any tax advice included in this communication is not intended or written to be used, and cannot be used, by a recipient for avoiding penalties that may be imposed on the recipient by any governmental taxing authority or agency.