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Author: LukeB546 Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 121180  
Subject: IRA Contribution from Grant-Based Income Date: 1/12/2010 8:36 PM
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Basically, I created a Roth IRA late in 2009, and by the end of the year had moved some money around between brokerage accounts to bring it up the maximum annual contribution of $5000. But, now, when asked on TurboTax what my IRA contribution was, I said $5000, and then it slapped me with about $200 more tax because my earned income was way below the amount that I contributed. I'm guessing this is that dreaded 6% excise tax due to excessive contribution...

The reason:
I am a graduate student receiving a stipend, which is not treated as hourly wages and for which there is no withholding. Further, I think it has to be filed as a taxable grant (because it's a "training grant" from the National Institutes of Health) on form 1099-G (right?), which places it in the realm of non-earned income, but income that is still taxable at the usual rate.
So, technically, the only earned income I received in 2009 was about ~$1800 worth, from a regular, withholding job earlier in the year. Since the fall, however, the ~$13000 that I received from the stipend apparently isn't earned income, but it is still taxed compensation.

The solution: ???
Any way around this narrow definition of "earned income"?
This seems like a raw deal to give people who spend 5yrs+ in school without earned income, because unless I pick up a teaching position somewhere down the road, 2009 is likely to be the last year I have "earned income" for some time.

Thanks! (And, I'm really new at filing my own taxes and the like, so the more explanation and detail, the better.)
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Author: LukeB546 Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 108478 of 121180
Subject: Re: IRA Contribution from Grant-Based Income Date: 1/13/2010 12:05 AM
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i'm looking at IRS publication 590, which is all about IRAs.
the stuff about contributions is on page 8.
first of all, there is no mention of income from taxable grants in the whole document, and there are only restrictions placed on scholarships/fellowships, where it states that income from those sources can only be contributed to an IRA if it is located in box 1 of a W-2 form. so, more specifically to my situation, i gather that income from a taxable grant (or something equivalent) is certainly not excluded. but, it isn't explicitly allowed, insomuch as that it's not listed as a valid source of compensation. (this is all from page 8...)

but, on the very bottom of page 56 it says that Roth IRA contributions don't have to be reported on the return. but then, there is information about excessive contributions on page 62.

so, i'm not sure what to think. how is the extent of the excess being assessed if it isn't reported on the return?

hmm... the total income used in determining your allowable IRA contribution seems to just get carried down from the "adjusted gross income" line of form 1040, where all forms of income get combined anyway...


if anyone can show me the big picture here, i'd be truly grateful!

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Author: Hohum777 Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 108479 of 121180
Subject: Re: IRA Contribution from Grant-Based Income Date: 1/13/2010 12:27 AM
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but, on the very bottom of page 56 it says that Roth IRA contributions don't have to be reported on the return. but then, there is information about excessive contributions on page 62.

so, i'm not sure what to think. how is the extent of the excess being assessed if it isn't reported on the return?




The Roth contribution doesn't get reported on the tax return. But your brokerage does report your contribution to the IRS. That's at least one way, the IRS can validate your earned income vs Roth contribution

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Author: TMFPMarti Big funky green star, 20000 posts Home Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 108481 of 121180
Subject: Re: IRA Contribution from Grant-Based Income Date: 1/13/2010 12:32 AM
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the total income used in determining your allowable IRA contribution seems to just get carried down from the "adjusted gross income" line of form 1040

No. It's the sum of 1040 lines 7, 11 and 12 minus line 27. That's the total of your "taxable compensation" unless something esoteric, like foreign earned income exclusion, comes into play. To explain why would take a lifetime both of us would better spend in other pursuits. As for getting caught, since it's late I'll spare you the lecture about ethical conduct and just say that contributions, including Roth contributions, are reported to IRS by the custodian even though you don't report Roth conributions on your return. You can figure out the rest.

Here's what you need to do:

1. Make sure you're properly reporting the grant income. From Chapter 1 of Pub 970 I know that some types of educational assistance can wind up on line 7, but I don't know enough about your specific situation, or the law, to say where your grant should be reported. You can probably get some better advice on that from peers or the awarders of the grant.

2. If you did make too much of a contribution, you have to withdraw the excess and the earnings on it. That's explained in Pub 590 (the rules are the same for traditional and Roth IRAs). Holler back if you need help.

Phil
Rule Your Retirement Home Fool

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