Contributing to a Roth IRA with a Taxable Scholarship

[cnallison]

I'm not in school anymore, but through the fellowship that pays me, all of my income is counted as a 'taxable scholarship'. I starting contributing to a Roth IRA in 2020, and according to 2019 Publication 590-A "For tax years beginning after December 31, 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."

Does anyone know what certain taxable non-tuition fellowships mean/how I could figure out whether my income is eligible to contribute to a Roth IRA? 

[MissMCJ]

IRS Publications are subject to interpretation.  My interpretation is that your scholarship would qualify as exactly what the IRS intends here.  You are being paid in wages not in a scholarship.  You are paying taxes which makes this a form of earned income.  You need earned income to contribute to a Roth IRA and in my opinion that is exactly what you have.

[macuser_22]

You must have "taxable compensation" to contribute to an IRA.  Not all taxable compensations is earned income. 

See IRS Pub 590A "What is Compensation"?

https://www.irs.gov/publications/p590a#en_US_2019_publink1000230355

"Scholarship and fellowship payments are compensation for IRA purposes only if shown in box 1 of Form W-2."

[MissMCJ]

It seems to me that the What is Compensation portion needs to be updated to address the scholarship compensation changes.  But "Scholarship and fellowship payments are compensation for IRA purposes only if shown in box 1 of Form W-2." seems to be the tie-breaker here.

[cnallison]

Thank you for linking that! I looked over it, and it says that it's for use in preparing 2019 tax returns- I'm wondering if I just jumped the gun here and should wait for when they release their 590-A for 2020, because they may define compensation differently then

[macuser_22]

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@MissMCJ wrote:

It seems to me that the What is Compensation portion needs to be updated to address the scholarship compensation changes.  But "Scholarship and fellowship payments are compensation for IRA purposes only if shown in box 1 of Form W-2." seems to be the tie-breaker here.

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For 2020 tax the updated (yet to be published)  Pub says:

Graduate or postdoctoral study. Compensation includes
any income paid to you to aid you in the pursuit of
graduate or postdoctoral study.

Certain taxable non-tuition fellowship and stipends.
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.

[macuser_22]

BTW:  Here is the link to that:

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

[Opus 17]

Earned income is income earned from working, from providing goods or services.  Scholarships and fellowships are not considered earned income because it is considered a training position and you are considered a student, even if you go to the office or lab every day and do research or experiments that seem like “working”.  Because scholarships and fellowships are not earned income, they are not subject to self-employment or Social Security tax and they do not qualify you for the earned income credit or certain other tax benefits.

As noticed by you and clarified by @macuser_22 , fellowships are considered compensation for purposes of making IRA contributions beginning in 2020.  (They are still not considered “earned income” for other purposes, however.)