Almost anyone with earned income under age 70½ can establish and contribute to a traditional Individual Retirement Account. Employees and self-employed persons can open IRAs for themselves, even if they already participate in tax-qualified, employer-sponsored plans. Participants in governmental plans also may open an IRA.  An individual may open more than one IRA, as long as he or she does not exceed the annual contribution limits.

No one over age 70½ may establish a new, traditional  IRA or contribute to an existing traditional IRA. With this one exception, age plays no factor in an individual’s ability to open an IRA.  As a result, children are eligible to open IRAs if they earn compensation from after-school jobs or summer employment.  Retired persons also may set up IRAs as long as they are under age 70½ at the end of the year in question and receive earned compensation (part-time jobs, consulting fees, etc.).  Individuals over age 70½ may not establish a traditional IRA or make new contributions. They may, however, set up a rollover IRA by rolling over a distribution from another qualified plan or IRA.

In the case of a married couple, if both spouses are employed, each spouse may set up his or her own IRA and contribute up to the annual limit. If only one spouse works, the employed spouse can set up a “spousal IRA” for a nonworking spouse. Spouses may not open a joint IRA account. A “spousal IRA” is essentially two separate IRA accounts, each subject to the annual contribution limits.  

 Earned Income

In  order to establish or contribute to an IRA,  a person must receive earned income during the year.  This includes wages, salaries, professional fees, and other amounts received for personal services.  Earned compensation also includes such items as sales commissions, compensation for services on the basis of a percentage of profits, commissions on insurance premiums, as well as tips and bonuses.  Taxable alimony or separate maintenance payments under a divorce decree are also considered earned income.

Earned income also includes compensation received by self-employed persons from a trade or business in which the individual renders income-producing services.  Mere ownership of a business is not enough — the self-employed individual must actually “work” at the business.  A self-employed person's IRA contribution is based on his or her income after retirement plan contributions have been deducted.  

For example,

Jake  Grossman, age 62, is a retired free-lance writer.  He maintains a Keogh account as well as an IRA.  Jake earned $4,500 for articles he wrote this year.  He contributed 20% into his Keogh or $900. For purposes of his IRA, he has earned compensation of $3,600 ($4,500 - $900).  

For persons who are active partners in a partnership and who provide income-producing services to the partnership, earned compensation includes the active partner’s share of partnership income. Partnership income is not considered “earned compensation” for IRA purposes if a partner merely invests in a the business and does not provide services to the partnership.

Earned income does not include return or profits from property, such as rent, dividends or interest. Also excluded are disability payments, foreign income and other amounts not includible in the taxpayer’s gross income.  Compensation for IRA purposes does not include deferred incentives such as stock options or stock appreciation rights. Also, earned compensation does not include pension or annuity payments, or other forms of deferred compensation.  The IRS does disallow IRA deductions when the taxpayer cannot prove the receipt of earned compensation.