At 66 She’ll Inherit $20,000 and Try to Put It All in a Roth IRA. With No Paycheck That Year, She Can’t Contribute a Dollar, Unless Her Husband Still Works

She’s 66, sitting at a brokerage desk with a $20,000 inheritance check, ready to put every dollar of it into a Roth IRA. Then the rep asks something she didn’t see coming: did you have earned income this year?

She retired last year, and her money now comes from Social Security and a bit of bank interest. So the answer is no, and that one answer closes the door. It’s a common problem. Retirees ask about it all the time on forums like r/Bogleheads, where a retired poster’s question about making IRA contributions drew a long thread of replies.

A Roth IRA Needs a Paycheck Behind It

Every IRA contribution, Roth or traditional, has to be backed by taxable compensation. In plain terms, that means money you earned from working. The IRS counts wages, salaries, commissions, and self-employment income. It leaves out pension or annuity income, interest income, and dividend income. Social Security isn’t included. An inheritance isn’t pay for work either, so it doesn’t count.

For 2026, the limit is $7,500 ($8,600 for individuals age 50 or older). On top of that, a contribution can’t exceed your taxable compensation. With zero earnings, her limit is zero. Even in a good year, $8,600 would leave most of the inheritance outside the account.

Roth IRAs also have income caps at the high end. For 2026, joint filers start getting phased out at $242,000 of modified adjusted gross income and lose eligibility completely at $252,000. Most retired couples are far below that. For her, the paycheck test matters most.

Her Husband’s Job Opens a Back Door

Here’s the twist. If her husband still works and they file jointly, she can contribute based on his pay. The tax code calls it the Kay Bailey Hutchison Spousal IRA. Each spouse can contribute the full amount even if one spouse has little or no compensation. The catch: her limit is capped by his compensation reduced by whatever he puts into his own IRAs. Together, their contributions can’t exceed what he earned.

So if his paycheck is big enough to cover both, they could put $8,600 into her Roth and the same into his. For a household where one spouse is still working, the inheritance should go there first.

Depositing It Anyway Costs 6% a Year

The brokerage might accept the deposit. The IRS won’t. Money contributed over the limit gets hit with a 6% tax for each year it stays in the account. On the full $20,000, that’s $1,200 a year until she fixes it.

To fix it, she withdraws the excess, along with any earnings, by her tax filing deadline (extensions included). Then it’s treated as an unmade contribution. Our recent guide covers exactly how to undo an excess Roth contribution.

Where the $20,000 Works Harder When Nobody Has a Paycheck

1. Convert existing traditional IRA money. The earned-income rule only applies to contributions, while Roth conversion is treated as a rollover. The converted amount is included in your gross income, which means a tax bill. This is where the inheritance earns its keep. She can pay that bill with the cash so the full converted amount stays invested. For 2026, joint filers get a $32,200 standard deduction, pay 12% on taxable income over $24,800, and pay 22% on taxable income over $100,800. If they keep joint income at or under $218,000, they also skip Medicare’s Part B surcharge, which looks at income from two years prior.
2. Open a regular taxable investment account. You won’t get tax-free growth, but there’s no contribution limit or paycheck test, and she can access the money whenever she wants. Broad, low-cost index funds keep the annual tax drag small.
3. Pay off debt or build a cash cushion. Any balance charging more than a portfolio can reliably earn is a guaranteed return to wipe out. A year of expenses in cash also keeps her from selling investments in a bad market.
4. Take a small job or freelance work. Self-employment income counts as compensation after you subtract the deductible part of your self-employment tax. If she’s claiming Social Security before full retirement age, the 2026 earnings limit is $24,480. A modest side gig can stay well below that.

If nobody in the house is working but she has traditional IRA money, option one comes closest to what she wanted. The money ends up in a Roth, and the inheritance pays the tax. Those quiet years between a last paycheck and the first required withdrawal are usually the cheapest conversion window a retiree ever sees, which is the whole subject of our free Roth window guide.

Answer This One Question Before Moving a Dollar

Who in the household had a paycheck this year? If her husband did, start with spousal Roth contributions up to his earnings, then put the rest toward a conversion or a taxable account. If nobody did, skip the contribution entirely and use the cash to cover the tax on a conversion.

She should avoid depositing the check and forgetting about it. That 6% tax comes back every year until the money is out.

Contact [email protected] for any questions or corrections.