Graduate and Postdoctoral Students: Contributing to a Roth IRA in 2022

[JollyErtapenem]

I'm a graduate student fortunate to receive a scholarship/fellowship grant from my institution that exceeds my tuition and qualified expenses. This results in a stipend that is deposited in my bank account. I would like to contribute some of this income to a Roth IRA. I entered my expected 1098-T information for 2022 in "Deductions & Credits > Expenses and Scholarships (Form 1098-T)" of TurboTax Premier Online, with Box 5 > Box 1 yielding taxable income. When I enter my Roth IRA contribution, TurboTax flags it as an excess contribution because my earned income is calculated as zero. How do I enter my 1098-T information so that TurboTax counts my stipend income toward a Roth IRA contribution?

I'm aware that scholarships/fellowships/stipends were historically not considered "earned income" and therefore could not be contributed to an IRA. But this exception was eliminated due to a 2019 law. Table 1-1 Compensation for Purposes of an IRA in IRS Publication 590-A (2021) was updated in 2022 to include "taxable non-tuition fellowship and stipend payments" in support of graduate or postdoctoral study.

[NCperson]

@JollyErtapenem 

here is a good article on the topic and potential confusion.

http://pfforphds.com/is-fellowship-income-eligible-to-be-contributed-to-an-ira/#:~:text=The%202021%2....

I suspect because the "income" is reported on a 1098-T and not on a W-2, TT flags the Roth Contribution as an issue.

Look at the FAQ in Turbo Tax: 

What counts as earned income?

Earned income includes:
- The amount in box 1 of your W-2s
- Commissions
- Self-employment income
- Taxable alimony payments you receive
- Nontaxable combat pay (look on your W-2 in box 12 with a code of Q)

Earned income does not include:
- Rental property income
- Investment income, such as interest income (reported on Form 1099-INT)
and dividend income (reported on Form 1099-DIV)
- Pension or annuity income
- Deferred compensation
- Income from a partnership for which you don't provide services
- Certain amounts that are excluded from your income, such as foreign earned income

it does not list the last type of earned income referenced in the table in publication 590-B (non-taxable tuition and stipend payments )

Might be worth a call the Turno Tax support to understand why that is so.

[Hal_Al]

You may just need to wait for an update.  Turbotax handled this properly on 2021 returns (I just tested it to be sure). I also just tried a test on the 2022 software (download Deluxe) and, as happened to you,  it is not working properly.

I'll notify TT of the problem. 

Q. How do I enter my 1098-T information so that TurboTax counts my stipend income toward a Roth IRA contribution?

A. Normally, all you have to do is check the grad school box at the 1098-T screen and indicate you have taxable scholarship going on line 1 of form 1040 with the SCH notation (starting in 2022, taxable scholarship goes on line 8r of Schedule 1).

[JollyErtapenem]

Thank you! Glad to hear this has worked in the past.

[AnnSD]

I have been in contact with TT for a total of 10 hours trying to resolve this problem. I spoke to CPA Walter on 2/19/23 who understood my explanation of the software problem and promised a fix. I just called TT and they do not have a record of my 3 phones with Walter on 2/19/23. I spoke to 3 prior tax advisors who could not help and were unable to escalate the situation.

Now that the stipend is being recorded on schedule 1, line 8r TT needs to change their software to look at the income on that line instead of 1040, line 1 with the SCH on that line that it did in 2021. But it must continue to not place it as income for certain states (like PA) who do not tax stipend income.

[Hal_Al · Accepted solution]

Here's a containment that was just made for this issue. 
https://ttlc.intuit.com/turbotax-support/en-us/help-article/retirement-benefits/fellowship-stipend-a...

[AnnSD]

Be aware that graduate students with stipends do not all get a W-2, 1098-T or 1099-Misc. I do not receive any forms. I get a yearly letter from the school stating my income. The stipend is still federally, not state, taxable and therefore, I should be able to contribute to an IRA. Although my taxes are not affected by a ROTH contribution I would still like TT to track it as it has done in the past. It's more serious of a problem for students making a tax deductible trad ira contribution.

[JollyErtapenem]

I just checked today and a question has been added asking how much of the taxable scholarship was used for graduate/postdoctoral study. This appears to get rid of the over-contribution warning message.

[KrisD15]

In order to be used for an IRA contribution, the scholarship needn't be for graduate studies, but the new question asked in the education section may be part of the update made in the TurboTax program. 

[rrn]

Got an email update that the issue of fellowship income & IRA deduction has been resolved. But it seems not, at least not on the online version.  I tried entering the income as Expenses & Scholarships, also tried as Misc Income, and still not considered for IRA deduction.  How do you enter the income to make it work?

[AnnSD]

I feel your pain.  I was on the phone with a TT CPA (no body is paying me for my time) yesterday and numerous other times. I updated the software ( I use a disk to load TT) and it's still not corrected. So don't kill yourself. I am waiting to hear back from the CPA for an update.  I have been complaining about this for a month.

[MarilynG1]

Generally, you report any portion of a scholarship, a fellowship grant, or other grant that you must include in gross income as follows:

• If filing Form 1040 or Form 1040-SR, include the taxable portion in the total amount reported on Line 1a of your tax return. If the taxable amount wasn't reported on Form W-2, enter it on Line 8 (attach Schedule 1 (Form 1040)PDF).
• If filing Form 1040-NR, report the taxable amount on Line 8 (attach Schedule 1 (Form 1040)).

You should then be able to make an IRA Contribution.  The issue is reported as fixed in TurboTax.  If you can give more details about the type of document reporting the income and error messages you receive, we'll try to help. 

Edited 3/3/2023 | 8:42  pm

[AnnSD]

Hi Marily,

The first thing you said about the income being reported on 1040, line 1 is dead wrong. Read the publication 970 for 2022 taxes. It is now reported on Schedule 1, line 8r. If it is forced into 1040, line 1 it could carry over to state taxes as taxable income which a stipend is NOT. So TT is picking it up correctly but not looking at the right line for income purposes for an IRA (traditional or ROTH). This is new from 2021 when it used to be on the 1040, line 1 with the letters SCH written on that line and a 5 digit form number which made no sense. The income is then carried over to to the 1040 lower down on the return. Can't remember the line right now. But it no longer goes on line 1 of the 1040.

I am updating TT regularly and it is still not working. Maybe it's working for the online version but NOT the disc version.  So please correct your entry as it is misleading.

[MarilynG1]

Thank you for pointing this out.  I used info from this IRS link; however, I didn't ask if you received a W-2, 1099 or 1098-T reporting the income. 

@AnnSD