Not everyone is eligible to make an annual Roth IRA contribution. We have seen several cases recently of individuals who contributed for many years until they discovered they were not eligible to make any Roth IRA contributions. Here is what you need to know.
First, you must have earned income in order to make a Roth IRA contribution. That means you must perform some type service to have earned income. Passive sources of income generally do not count. As a result, Social Security and payments from any type of retirement plan are not earned income. Rental income is generally not earned income. Investment income and interest income also do not qualify. Disability income will not qualify.
Many people think that if they have after-tax income they can put it into a Roth IRA. This is not true. Gains on the sale of a home or from investments cannot be contributed to an IRA just because they are after-tax funds.