Investing Retirement Planning IRAs Should You Open an IRA While You're on Unemployment? It’s possible if you understand the rules and consider other financial goals By Ben Luthi Ben Luthi Twitter Ben Luthi has been writing about personal finance since 2013, helping people understand how to make the most of credit card rewards and make smart financial decisions. He has written for NerdWallet, Student Loan Hero, U.S. News & World Report, and Bankrate, among others. learn about our editorial policies Updated on March 11, 2022 Reviewed by Anthony Battle Reviewed by Anthony Battle Anthony Battle is a CERTIFIED FINANCIAL PLANNER™ professional. He earned the Chartered Financial Consultant® designation for advanced financial planning, the Chartered Life Underwriter® designation for advanced insurance specialization, the Accredited Financial Counselor® for Financial Counseling and both the Retirement Income Certified Professional®, and Certified Retirement Counselor designations for advance retirement planning. learn about our financial review board Fact checked by Emily Ernsberger Fact checked by Emily Ernsberger Twitter Emily Ernsberger is a fact-checker and award-winning former newspaper reporter with experience covering local government and court cases. She also served as an editor for a weekly print publication. Her stint as a legal assistant at a law firm equipped her to track down legal, policy and financial information. learn about our editorial policies In This Article View All In This Article Who Can Open an IRA? Can I Contribute While Unemployed? Why Would I Want To Open an IRA? Saving Strategies During Unemployed Some Tips for Saving The Bottom Line Photo: Tinpixels / Getty Images Unemployment numbers have fallen since spiking to nearly 15% in April 2020. The unemployment rate was 4.8% in September 2021, but millions of people in the U.S. continue to worry about their immediate financial needs even with the decline. The current situation may feel urgent, but retirement is still going to come. Depending on your situation, you may be wondering whether it’s a good idea to contribute to an individual retirement account (IRA), or whether it’s even an option at this point in time. Here’s what you need to know about opening an IRA, especially if you’re one of the many people in the U.S. on unemployment. Key Takeaways To fund an IRA, you or your spouse must have received earned income during the year.Your eligibility is based on your income for the full year, not just right now.Prior earned income during the year before you became unemployed may make you eligible.Make sure you know the rules and best practices to accomplish your retirement goal without sacrificing your present financial health. Who Can Open an IRA? IRAs can provide significant tax benefits to people who have earned income (or have a spouse with earned income) during the year. Earned income is compensation from working. It can include salaries, wages, commissions, self-employment income, taxable alimony and separate maintenance, and nontaxable combat pay. The IRS does not consider unemployment income to be earned income. You can open an IRA if you’ve earned any of these forms of income during the year in which you’re unemployed, no matter how much. Both you and your spouse can potentially receive a tax deduction on IRA contributions if you’re unemployed, but your spouse is still working. You aren't eligible to receive an IRA tax deduction if you’re unmarried without any earned income this year, or if you're married but neither of you has received eligible compensation the entire year. This is assuming it is past the tax filing deadline. If before the tax filing deadline, you can consider whether any earned income was received in the prior year. Note You can still open an IRA if you’re on unemployment benefits now, but you were working and earning income earlier in the tax year. Can I Contribute to an IRA While on Unemployment? The same rules apply if you already have an IRA or you’re thinking of opening one. You—or your spouse, if applicable—must have earned income to make contributions. For the 2021 and into the 2022 tax years, you may be able to contribute up to the maximum of $6,000 each, or $7,000 if you’re age 50 or older, if you’re on unemployment benefits but your spouse is still working. Remember that your eligibility is based on income for the full year, not just the present time. You may be limited as to how much you can contribute based on your income, however. For example, you’d likely be limited to $3,500 in contributions for the year if you only earned $3,500 in eligible income for the year. Why Would I Want To Open an IRA? There are a few reasons to consider opening an IRA while you're unemployed. An IRA can make it possible to keep up with your retirement savings plan so you don’t fall too far behind, even if your current situation isn't ideal. You may need to save more going forward to make up for lost time if you wait until you're working again. Note The sooner you start saving for retirement, the more you’ll benefit from compound interest. If your previous employer offered a 401(k) plan, rolling it over into an IRA will allow you to continue to make contributions to your retirement savings and give you more control over how you invest your money. Strategies for Saving While on Unemployment There are some clear benefits to saving if it's possible for you to set money aside for retirement while you're unemployed. But are retirement savings a priority when you don't have earned income or a job? It might not be possible to save for retirement if money is so tight that you need to focus on immediate living expenses. It might make more sense to bolster your emergency savings in these situations. But consider whether you could put that money to better use with other financial goals if you do have some room in your budget that you could put toward your retirement. “If you've already built up your emergency fund, and you have excess money that you really don't need within the next five years, then taking advantage of tax-deferred growth may be smart," certified financial planner Riley Poppy told The Balance. "An IRA truly is intended as a long-term vehicle. However, definitely evaluate your living expenses in the future. Over-investing living expenses can be dangerous for those unemployed.” Note The amount of money you’d save by paying off your credit cards could outpace the benefits you’d get from saving for retirement if you have high-interest card debt. “[Being] overloaded by credit card or bad debt with interest rates [of] 18% to 24% would hurt people more than what they can gain from any investment in any IRA,” Eric Kam, a financial educator, told The Balance. Some Tips for Saving Some more tips can help you make your efforts more effective if you’re in a good place to save for retirement through an IRA. Make Sure You’re Using the Right Account There are two types of IRAs: traditional and Roth. The distinction is important because of the way they're taxed, according to Colin Day, a financial advisor with St. Louis-based Correct Capital Wealth Management. The IRS taxes your Roth contributions now rather than later in life when you make withdrawals, unlike with a traditional IRA, for which you can claim tax deductions for contributions in the year you make them. You'd have a Roth-specific advantage if your income were low this year because of a job loss. “If you’re in a lower tax bracket...funding a Roth IRA could make long-term financial sense, because you’ll probably be in a higher tax bracket in retirement,” Day told The Balance. “Because you won’t pay taxes on a Roth IRA, you get the benefit of funding the account in a low tax bracket and pay no taxes later.” Budget Your Savings Following a budget won't just help you understand where your money is going. It will also show you where you can cut back in certain areas and reallocate those funds for financial goals like retirement. Set Up Automatic Transfers Consider setting up an automatic monthly transfer to your IRA and treating it like any other expense or bill to ensure that it happens. You may be prone to spending whatever money you have leftover if you’re relying on manual contributions to your IRA. The Bottom Line Contributing to an IRA while you’re unemployed may not seem possible. But if your household’s financial situation allows for it, make sure you know the rules and the best practices to accomplish your retirement goal without sacrificing your present financial health. Was this page helpful? Thanks for your feedback! Tell us why! Other Submit Sources The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy. U.S. Bureau of Labor Statistics. "The Employment Situation." Internal Revenue Service. "Publication 590-A (2019), Contributions to Individual Retirement Arrangements (IRAs)." Internal Revenue Service. "Retirement Topics - IRA Contribution Limits." Internal Revenue Service. "Coronavirus-Related Relief for Retirement Plans and IRAs Questions and Answers."