Function

• The IRS spells out acceptable IRA funding sources in its Publication 590, and Social Security benefits are not among them. Earned income includes wages, tips and commissions from a job, in addition to self-employment income earned from a small business or independent contracting work. Also, you can fund your IRA with nontaxable combat pay or military differential pay. You may also contribute alimony to an IRA.
  
  

Effects

• Each year, the IRS determines Roth and traditional IRA contribution caps. In 2010, the limit is $5,000 if you are under 50, and $6,000 if you are 50 or older. However, your limit is actually the lesser of your earned income and the annual cap. For instance, if you had a part-time seasonal job in 2010 and earned $3,500 in wages, and had no other sources of income that qualify for IRA contributions, your IRA contribution cap for the year is $3,500 even though the maximum cap is higher.
  
  

Significance

• Receiving Social Security income does not preclude you from making an IRA contribution, provided that you have other sources of income from acceptable IRA funding sources. For instance, if you are 62 and earned $6,000 from a part-time job in 2010, and received Social Security benefits that totaled $20,000, there is nothing to prevent you from contributing the maximum $6,000 limit to your IRA -- the contribution does not exceed your earned income.
  
  

Spousal IRAs

• Only one person may own an IRA. Therefore, IRA rules circumvent the earned-income requirement for spouses who file jointly with their partners but who make little or no money of their own. If you and your spouse's joint income is large enough to cover both of your total Roth and traditional IRA contributions, you may both contribute the maximum amount to your IRAs. This is the case even if one of you earned less than the contribution limit. If the non-earning spouse received Social Security income, he may contribute that to his IRA -- the source of the contribution does not matter.
  
  

Considerations

• No matter how much of your income is deemed eligible for IRA contributions, the IRS enforces income limits that may lessen or eliminate your allowable traditional IRA write-off, or your allowable Roth IRA contribution. The income limits are based on your total taxable compensation, which in some circumstances could include Social Security income.