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I am at a loss for words. I still can’t believe what I have just learned! Earlier this year I had decided to start a Roth IRA and finally start saving for retirement, since I’m not “employed” and don’t have any company retirement plan in existence and I won’t for a while yet. I have been doing a fair amount of research, and had pretty much decided to go with a Vanguard Roth IRA. I was just being lazy and not setting it up yet — but yesterday I found out the most horrible news. Apparently, my fellowship is considered “taxable income” but not “earned income.” This means that unless I find another way to earn roughly $4000 a year and have it show up in box 1 of the Form W-2, then I can’t even set up an IRA!!

Proof is in the pudding:

Hi Heather,

Yes. The proof is on IRS publication 970 page 5:

“You can set up and make contributions to an IRA if you receive taxable compensation. Under this rule, a taxable scholarship or fellowship is compensation only if it is shown in box 1 of Form W-2, Wage and Tax Statement.”

A fellowship is taxable income, but in most cases it’s not considered compensation, or “earned income” (so it’s taxable income in the same sense that you have to pay taxes on dividend income). I must say that it frustrated me to no extent when I first found out that congress actually took the time to specifically disallow in the tax code graduate students from saving for retirement – especially since we’re already at a disadvantage by postponing earning real income for years, but that’s the way it works.

That said, if you receive any other form of compensation (for instance, if your fellowship requires that you also hold a certain number of TA/RA hours to meet the required needs of your school expenses) this portion will count as earned income. Also, if your in a situation that would allow you to hold a side job (I know this can be almost impossible in most research related fields) where you could earn roughly $4000 in a year, that would work.

I really do not know enough about self employment to advise you further, possibly Johnathan could do a brief article sometime in the future on some of the in and outs of how self-employment works.


6 Responses to “Graduate students on fellowships denied IRA contributions”

  1. stardo says:

    ouch, though it makes some sense. ideally your fellowships would be going towards rent/food/living in general instead of retirement savings, or at least that seems to be the IRS’s idea of the situation.

    there are no doubt ways to skirt around this without actually doing work, somehow, if you already have the money saved up somewhere. none that i can think of without paying taxes on that income.

    like james says, if your situation affords it, it’d prolly be best to get some side job. i say bartending friday/saturday nights. or waitressing. get some generous tips and you could find yourself with $4000 in earned income (pre-tax is all you need woo).

    of course you could take my earlier suggestion and put that heather happy dance to good use and get much more generous tips to earn that $4k much much faster. lolzx10bbq.

  2. stardo says:

    yeah i agree, it sucks because you are working and your fellowship is kinda like compensation for that but it doesn’t count. yeah they could target the kids who saved up a bunch for college then got tons of scholarships and what not and now have lots of money.

    yeah you probably can have your pick of summer jobs, as opposed to most undergrads. something fun and (hopefully) resume building is prolly the way to go.

    that said, it still sucks.

  3. Heather says:

    Yeah, I don’t think they are targeting graduate students though. Most graduate students have RAships or Taships, which is earned income that shows up on your W-2, so you’d be allowed to stow some towards your Roth. It’s just those lucky few who friggin worked our butt off to win a national fellowship that gets screwed by this.

    I think that they are trying to prevent those students (undergraduate mostly) who receive only scholarships, and perhaps are getting supported by their parents so they don’t have to work, from using their scholarship money towards IRAs (would have been a darn good idea, and since I also had multiple jobs as an undergraduate, I could have still been contributing. I wish I had been smart enough to start saving then). But in my case, I am WORKING for my money, it’s not just being handed to me, so I should be able to use it for whatever I want (including retirement). Just my 0.02.

    However, *happy dance*, I did remember that I worked at Intel this year (haha, how could I forget?), so I can do my maximum contributions to Roth this year. Now I just have to figure out a way (summer job maybe?) that I can earn that extra $4k income the following two years.

    And I could never ever ever be a waitress. I cannot handle rude people, and I’m far too clumsy. And I’ve already done my time in retail, so no going back to that. Thanks for the advice though ;) If I did anything on the side, it would be some fun job like REI or tutoring high schoolers or something I actually enjoyed doing.

  4. Heather says:

    Ummm…you seem to neglect the obvious. I still will be employed full-time (40 hrs min.) doing research. So “pick of summer jobs” is not exactly true :(

    And my fellowship is “kinda like compensation”? It IS compensation! I am obligated to do research and take a full load of courses, otherwise I don’t get paid. It just so happens that my paycheck comes once a month, and from NSF instead of the cheme department. *shakes head* some people don’t understand what being a full time graduate student is like. I think many people still have the notion that it’s just taking classes…when in fact you are working full time in the lab too.

  5. […] Of course, as a grad student, I wasn’t able to contribute to a 401k (I wasn’t even able to contribute to a regular Roth IRA for reasons that still boggle my mind). […]

  6. Natasha says:

    so frustrating! I just finished up with taxes and googled to see if there were others in my same situation. Guess I will go ahead and file if this is this the case.

    SO unfair.

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