Can I contribute to a Roth IRA

melissaforpeace315 · ‎January 2, 2022

Hi all! If you can please help provide some insight to my questions below? I would greatly appreciate it!

1) I know that in order to contribute to a Roth IRA, I need to have earned income. So does that mean that the IRS actually checks if you've earned any income for the year ? Like if they don't receive some type of W4 from a company then they will penalize you for contributing to the Roth IRA? What if I work for my school? I work as a professor's assistant (teacher's assistant, i.e TA) and have some earned income. Does that count? Does my school send W4's to the IRS? Otherwise, how will the IRS know that I have earned income from my school?

2) I am going to be a TA for the spring semester (the first part of 2022) but I will no longer be a TA for the fall semester (the latter part of 2022). Am I still eligible to contribute to a Roth IRA during the first part of 2022 (when I'm still employed)? Am I still eligible to contribute to a Roth IRA during the latter part of 2022 (when I'm no longer employed)? Does the IRS specify that a person needs to have earned income CONSISTENTLY throughout the whole year in order to contribute? Just asking because if this is the case, then I won't quality.

However, if it's only the case where I can contribute if I am employed, then I will go ahead and make my 2022 Roth IRA contribution in the early part of 2022 (when I'm employed) and then won't make any more contributions towards the end of the year (when I'm no longer employed)

If I do the above, will there be any penalties? Are there going to be penalties if I contribute when I'm employed, and then do not contribute when I'm no longer employed for that year?

Alternatively, let's say that I'm employed in the first part of 2022 but then I'm no longer employed in the latter part of 2022.... does that mean that if I contribute to my Roth IRA during the latter part (when I'm not employed), then I will be assessed a tax penalty even though I DID work in the beginning of the year? Is there any specification on the duration of my employment that enables me to contribute to the Roth IRA account?

I really appreciate your help!

Opus 17 · ‎January 3, 2022

@melissaforpeace315 wrote:

@Opus 17 Hi! I was reading your statement about how being a teacher's assistant might not even count as compensation and that "even if you are paid extra, it is considered part of your education. If participating as a teaching assistant is not required, or if you teach additional classes beyond the degree requirement, payment for that participation would be considered compensation."

How do I know if I fall under the category of "education" or "compensation"? I mean I'm paid every two weeks just like any other TA is supposed to be paid in my department. I mean my Ph.D program DOES require all Ph.D students to be a TA in a particular class. What are the indicators that my job as a TA is considered part of "education" versus "compensation"? How do I know for sure what category the IRS has my job listed as? I mean I presume I can ask my school administratraion / payroll department but I have a good feeling that they don't know this or are not very smart about this stuff (I've communicated with them regarding other situations / questions before and they were not very helpful at all)

Lastly, if my TA job is indeed categorized as "compensation" (rather than "education"), what documentation do I need to provide to the IRS come tax filing time? Just so that they won't penalize me for contributing to the Roth IRA?

I really appreciate your help!

This is a really complicated area, and I'm sorry your own payroll department is unclear.

The simplest test of whether income is compensation is that it is subject to social security and medicare withholding. However, as a student, your stipend is exempt from this withholding, and even if you were being compensated for working, you are exempt from SS and medicare withholding if you are working for your school. So your W-2 will probably have boxes 3-6 blank, and this may cause the IRS and Turbotax to believe you don't have compensation from working, even if it is compensation.

Many schools have switched to paying their graduate students on a 1099-MISC, counting the money as a student stipend rather than wages. In this situation, the school would issue a separate W-2 that would only include wages earned from working, separate from the degree program. (Like, working as a library assistant.) In this arrangement, the school would not issue a W-2 for TA earnings if it was required for your degree, but would issue a W-2 if you performed extra TA duties beyond your degree requirement.

Further complicating matters, there was a tax law change in 2019 so that graduate fellowships are considered "compensation" for making IRA contributions even though they are not "earned income" for any other purpose.

Certain taxable non-tuition fellowship and stipend payments. For tax years beginning after 2019, certain taxable non-tuition fellowship and stipend payments are treated as compensation for the purpose of IRA contributions. Compensation will include any amount included in your gross income and paid to aid in your pursuit of graduate or postdoctoral study.

There are so many graduate student arrangements, it is difficult to give a precise answer without knowing exactly what is going on. Most of my experience is in the biomedical sciences, where students get their tuition "comped" by the school (via grants, mostly) and the students also get a stipend (also mostly funded from grants via the PI or mentor). Things may be different in other programs where the student pays their own tuition, but may then receive a stipend to offset the tuition for being a TA or performing other services.

Lastly, as of 2020, turbotax did not recognize fellowships as "compensation" for IRA contributions and would raise an error. I haven't checked what it will do for 2021, and I don't remember the fix for 2020.

See what you can make of the above information as applied to your situation, and feel free to come back for further clarification.

View solution in original post

VolvoGirl · ‎January 2, 2022

When you worked during the year doesn't matter. As long as you have earned income you can contribute anytime. If you are an employee you will get a W2 by Jan 31 to report your income. The W4 is the form you gave your employer to tell him how much withholding to take out for you. It does not get sent to the IRS. The IRS gets a copy of the W2.

if you have self employment income it also counts as earned income. You might get a 1099NEC for self employment.

See IRS Pub 590-A IRA Contributions

https://www.irs.gov/pub/irs-pdf/p590a.pdf

Critter-3 · ‎January 2, 2022

Ok ... to make any IRA contribution for the tax year you must have earned income sometime during the year and your contribution is limited to the lesser of the max allowed for the year or your earned income for the entire tax year. Contributions for 2021 can be made until 4/18/2022. And yes the IRS does confirm you had earned income against the form 5498 that the IRA custodian sends them and penalties/interest can and will be applied to any excess contributions you make.

fanfare · ‎January 3, 2022

whatever amount is on Line 1 of your 1040 you can put in a Roth,

as long as your AGI is below the cutoff and below the $6,000 limit.

If you don't have the compensation, and the IRS catches you, then there is a penalty of 6% per year.

If your Roth goes up a lot, or you expect it to, it might be worth it to pay that penalty. After one year from tax due date including extension, you can retain the earnings in that erroneous Roth within the Roth forever.

Opus 17 · ‎January 3, 2022

You must have compensation from services performed. your IRA contribution limit is $6000, or your actual compensation, whichever is less. contributions for the 2021 tax year can be made as late as April 15, 2022, as long as you inform the custodian that this is a prior year contribution before you make the contribution. A contribution may be made anytime during the year, it does not have to be made during the same weeks when you are earning your compensation.

However, you must be careful in your particular situation. In some degree programs, being a teaching assistant is required to obtain your degree. In that case it is not considered compensation even if you are paid extra, it is considered part of your education. If participating as a teaching assistant is not required, or if you teach additional classes beyond the degree requirement, payment for that participation would be considered compensation.

melissaforpeace315 · ‎January 3, 2022

@Opus 17 Hi! I was reading your statement about how being a teacher's assistant might not even count as compensation and that "even if you are paid extra, it is considered part of your education. If participating as a teaching assistant is not required, or if you teach additional classes beyond the degree requirement, payment for that participation would be considered compensation."

How do I know if I fall under the category of "education" or "compensation"? I mean I'm paid every two weeks just like any other TA is supposed to be paid in my department. I mean my Ph.D program DOES require all Ph.D students to be a TA in a particular class. What are the indicators that my job as a TA is considered part of "education" versus "compensation"? How do I know for sure what category the IRS has my job listed as? I mean I presume I can ask my school administratraion / payroll department but I have a good feeling that they don't know this or are not very smart about this stuff (I've communicated with them regarding other situations / questions before and they were not very helpful at all)

Lastly, if my TA job is indeed categorized as "compensation" (rather than "education"), what documentation do I need to provide to the IRS come tax filing time? Just so that they won't penalize me for contributing to the Roth IRA?

I really appreciate your help!

Opus 17 · ‎January 3, 2022