To contribute to an IRA, you need earned income, and the IRS uses that term narrowly: it means money you received for work you personally performed. Investment returns, retirement benefits, and rental income don’t qualify no matter how large they are. For 2026, you can contribute up to $7,500, or $8,600 if you’re 50 or older, but never more than you actually earned during the year.1Internal Revenue Service. 401(k) Limit Increases to $24,500 for 2026, IRA Limit Increases to $7,500
What Counts as Compensation
The tax code lists a short set of income types that qualify you to fund an IRA. Each one comes from work.2Office of the Law Revision Counsel. 26 USC 219 – Retirement Savings
- Wages, salaries, tips, bonuses, and professional fees. Anything reported in Box 1 of your W-2 counts.3Internal Revenue Service. Publication 590-A – Contributions to Individual Retirement Arrangements (IRAs)
- Commissions tied to sales or profits.
- Net self-employment earnings. If you freelance or run a business, your qualifying amount is net earnings after subtracting deductible retirement plan contributions and the deductible portion of your self-employment tax.3Internal Revenue Service. Publication 590-A – Contributions to Individual Retirement Arrangements (IRAs)
- Taxable alimony from a divorce or separation agreement finalized on or before December 31, 2018. Agreements executed after that date fall under the Tax Cuts and Jobs Act, which made alimony nontaxable to the recipient and therefore ineligible.4Internal Revenue Service. Publication 590-A – Contributions to Individual Retirement Arrangements (IRAs)
- Nontaxable combat pay. Military members serving in a combat zone can use their tax-free combat pay even though it doesn’t appear in taxable income. Look for code Q in Box 12 of the W-2.5Internal Revenue Service. Miscellaneous Provisions – Combat Zone Service
- Taxable graduate and postdoctoral stipends. Since 2020, taxable non-tuition fellowship and stipend payments for graduate or postdoctoral study count as compensation, even when they aren’t on a W-2.3Internal Revenue Service. Publication 590-A – Contributions to Individual Retirement Arrangements (IRAs)
The last two are the ones people miss. Before 2020, PhD students living on fellowship income had no way to contribute to an IRA. Combat pay recipients have long had the option, but only if they know to claim it.
What Doesn’t Count
Federal law explicitly excludes anything that isn’t the direct product of your labor.6Legal Information Institute. 26 USC 219(f)(1) – Compensation The categories that trip people up most often:
Investment income of any kind. Interest, dividends, and capital gains don’t qualify, no matter how much time you spend managing your portfolio. Rental income is out as well because the IRS treats it as passive.
Retirement benefits. Pension payments, annuity distributions, Social Security, and deferred compensation all represent income earned earlier being paid out now, not new compensation. A retiree living entirely on Social Security and a pension has no qualifying income for an IRA, even with plenty of cash on hand.
How Your Compensation Sets the Ceiling
Your IRA contribution for the year can’t exceed either the annual dollar limit or your total qualifying compensation, whichever is smaller.7Internal Revenue Service. Retirement Topics – IRA Contribution Limits If you earned $4,200 at a part-time job, your maximum contribution is $4,200. The dollar cap only matters when your compensation exceeds it. For part-time employees, seasonal workers, and students living on qualifying fellowship income, compensation is usually the binding number.
For 2026, the age-based dollar limits are:1Internal Revenue Service. 401(k) Limit Increases to $24,500 for 2026, IRA Limit Increases to $7,500
- Under 50: up to $7,500
- 50 and older: up to $8,600, which includes a $1,100 catch-up contribution
The catch-up amount now adjusts annually for inflation under SECURE 2.0, which is why it rose from $1,000 to $1,100 for 2026. The enhanced catch-up for ages 60 through 63 you may have read about applies only to workplace plans like 401(k)s, not to IRAs.
These caps are combined across all your IRAs. Total contributions to your traditional and Roth accounts together can’t exceed the applicable dollar limit. There’s no separate allowance for each account type.
Spousal Contributions When One Partner Doesn’t Work
A non-working or low-earning spouse can still make a full IRA contribution using the other spouse’s earnings. The Kay Bailey Hutchison Spousal IRA provision requires only two things: a joint tax return and enough combined compensation to cover both contributions.2Office of the Law Revision Counsel. 26 USC 219 – Retirement Savings
The non-working spouse’s contribution limit is the lesser of the annual dollar cap or the couple’s combined compensation minus whatever the working spouse already contributed to their own IRA. If one spouse earns $80,000 and the other earns nothing, both can contribute the full $7,500 to separate accounts.1Internal Revenue Service. 401(k) Limit Increases to $24,500 for 2026, IRA Limit Increases to $7,500 Each spouse owns their own IRA; the accounts stay separate even though the funding comes from one paycheck. For stay-at-home parents and people between jobs, this is the only way to keep building tax-advantaged retirement savings during years without earnings.
Fixing a Contribution You Weren’t Eligible to Make
Contributing more than your compensation allows, or contributing with income that doesn’t qualify, creates an excess contribution. The IRS charges a 6% excise tax on the excess amount for every year it stays in the account.8Office of the Law Revision Counsel. 26 USC 4973 – Tax on Excess Contributions to Certain Tax-Favored Accounts and Annuities The penalty compounds annually.
Two windows let you avoid the excise tax entirely:9Internal Revenue Service. Instructions for Form 5329
- Before your tax-filing deadline, including extensions: withdraw the excess plus any earnings it generated, and include those earnings in your gross income for the year the contribution was made. If you already deducted the contribution, don’t deduct the portion you’re pulling out.
- Up to six months after the original due date, not counting extensions: if you already filed without correcting the excess, you can still withdraw it within this window and file an amended return with “Filed pursuant to section 301.9100-2” written at the top.
If you contributed to the wrong type of IRA rather than contributing too much, recharacterization is often cleaner. Your custodian transfers the contribution plus attributable earnings to the other IRA type in a trustee-to-trustee transfer by your tax-filing deadline, including extensions, and the IRS treats the contribution as if it had gone there originally.10eCFR. 26 CFR 1.408A-5 – Recharacterized Contributions Recharacterization can’t be used on employer SEP or SIMPLE contributions or on Roth conversions, but for an individual who miscalculated eligibility, it preserves the tax-advantaged space for the year.