Earned Income: Why You Need It for Retirement Saving

IRAs can be great ways to save for retirement, but in order to qualify for them, you need to have earned income. But what is earned income, and how can you make sure you have enough of it to qualify to use an IRA?

In the following video, Dan Caplinger, The Motley Fool's director of investment planning, explains the concept of earned income. Dan notes because IRAs are designed to encourage work, lawmakers wanted to require income from a job in order to use an IRA. But earned income goes beyond simple salaries and wages, including not only tips but also other types of income like self-employment income, long-term disability payments, and union strike benefits. Yet Dan also lists some types of income that aren't earned income, including investment income, unemployment, and Social Security benefits. Although these restrictions keep some people from using IRAs, they're relatively flexible in allowing most people who get their income from their own work to use IRAs.