At 66, She Expects a $20,000 Inheritance and Wants It in a Roth IRA. But Without Earned Income, She Can’t Contribute Unless Her Husband Still Has a Paycheck

She showed up at the brokerage with a $20,000 inheritance and intended to place all of it into a Roth IRA. Then a simple question from the representative stopped everything: did she have earned income this year?

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She is 66 and sitting at a brokerage desk with a $20,000 inheritance check, ready to fund a Roth IRA with every dollar. But the rep asks something she had not expected: whether she earned income during the year.

She retired last year and now lives on Social Security plus a small amount of bank interest. So the answer is no, and that one answer shuts the door. It is a familiar issue. Retirees bring up this question often in online forums such as r/Bogleheads, where one retired poster’s IRA contribution question sparked a lengthy discussion.

A Roth IRA Requires Earned Income

IRA contributions, whether Roth or traditional, must be supported by taxable compensation. In simple terms, that means income from work. The IRS includes wages, salaries, commissions, and self-employment income. It excludes pension or annuity income, interest income, and dividend income. Social Security does not count either. An inheritance is not pay for labor, so it also does not qualify.

For 2026, the contribution limit is $7,500, or $8,600 for people age 50 and older. Just as important, the contribution cannot be greater than taxable compensation. With no earnings, her contribution limit is zero. And even in a year with enough income, $8,600 would still leave most of the inheritance outside the account.

Roth IRAs also have income limits at the upper end. For 2026, married couples filing jointly begin phasing out at $242,000 of modified adjusted gross income and lose eligibility completely at $252,000. Most retired couples are well below that range. For her, the income-from-work requirement is the key issue.

A Working Spouse Can Change the Picture

There is one important exception. If her husband is still employed and they file a joint return, she may contribute based on his earnings. The tax code refers to this as the Kay Bailey Hutchison spousal IRA. Each spouse may contribute the full amount even if one spouse has little or no compensation. The limitation is that her contribution cannot exceed his compensation after subtracting anything he puts into his own IRAs. Together, their total contributions cannot be more than what he earned.

So if his wages are high enough to support both accounts, they could contribute $8,600 to her Roth and the same amount to his. In a household where one spouse is still working, the inheritance should be used there first.

Putting It In Anyway Can Trigger a 6% Annual Tax

The brokerage might accept the deposit, but the IRS will not ignore it. Any contribution above the limit is subject to a 6% tax for every year it remains in the account. On the full $20,000, that works out to $1,200 a year until the mistake is corrected.

To correct the problem, she must withdraw the excess amount, along with any earnings it generated, by the tax filing deadline, extensions included. At that point, the contribution is treated as though it was never made. A recent guide explains how to undo an excess Roth contribution.

Better Uses for the $20,000 When No One Has Paycheck Income

1. Convert money already sitting in a traditional IRA. The earned-income rule applies only to contributions, while a Roth conversion is treated as a rollover. The converted amount is added to gross income, so taxes will be due. This is where the inheritance can help: she can use the cash to pay that tax bill so the full converted amount remains invested. For 2026, married filers receive a $32,200 standard deduction, pay 12% on taxable income above $24,800, and pay 22% above $100,800. If they keep joint income at or below $218,000, they also avoid Medicare Part B surcharges, which are based on income from two years earlier.
2. Open a regular taxable brokerage account. This will not provide tax-free growth, but there is no contribution limit and no earnings test, and she can withdraw the money whenever she wants. Broad, low-cost index funds can help keep annual tax drag low.
3. Pay down debt or strengthen an emergency reserve. Any debt with an interest rate above what a portfolio can reliably earn is a guaranteed return if it is eliminated. Holding a year of expenses in cash can also prevent forced sales during a weak market.
4. Take a small job or do freelance work. Self-employment income counts as compensation after deducting the allowable part of self-employment tax. If she is collecting Social Security before full retirement age, the 2026 earnings limit is $24,480. A modest side income can stay well below that level.

If no one in the household is working but she has traditional IRA money, the first option comes closest to her original goal. The funds end up in a Roth, and the inheritance pays the tax. The period between a final paycheck and the first required withdrawal is often the most favorable time for a retiree to convert money, which is the focus of our free Roth window guide.

Check One Thing Before Moving Any Money

The key question is simple: who in the household had a paycheck this year? If her husband did, begin with spousal Roth contributions up to his compensation, then use any remaining money for a conversion or a taxable account. If nobody had earned income, skip the contribution and use the cash to cover the tax on a conversion instead.

She should not deposit the check and assume everything is fine. The 6% tax will keep coming back every year until the excess money is removed.