No, the stimulus payments don't count as earned income for IRA contributions. The stimulus payments are not taxable income.
If you did not have enough earned income then you will have to remove the excess contribution plus earnings by the due date of the return to avoid the 6% penalty tax. Please contact your bank to request to withdrawal of excess contribution plus earnings.
The earnings of a 2020 contribution will be taxable in 2020. You will get a 2021 1099-R in 2022 with codes P and J for the withdrawal of excess contribution and earnings . This 1099-R will have to be included on your 2020 tax return and you have two options:
- You can wait until you receive the 1099-R 2021 in 2022 and amend your 2020 return or
- You can report it now in your 2020 return and ignore the 1099-R when it comes unless there is Box 4 Federal Tax withholding and/or Box 14 State withholding. Then you must enter the 2021 1099-R into the 2021 tax return since the withholding is reported in the year that the tax was withheld. The 2021 code P will not do anything in 2021 tax return but the withholding will be applied to 2021.
To create a 1099-R in your 2020 return please follow the steps below:
- Login to your TurboTax Account
- Click on the "Search" on the top right and type “1099-R”
- Click on “Jump to 1099-R”
- Answer "Yes" to "Did you get a 1099-R in 2020?"
- Select "I'll type it in myself"
- Box 1 enter total distribution (contribution plus earning)
- Box 2a enter the earnings
- Box 7 enter P and J
- Click "Continue"
- On the "Which year on Form 1099-R" screen say that this is a 2021 1099-R.
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