Over contributed to Roth IRA due to summer job stipend - what to do?

This is a common issue for grad students! Your roommate has a few options to fix the over-contribution to her Roth IRA. First, it's important to understand why this happened. For IRA contributions, you need "earned income" - wages, salaries, tips, etc. Unfortunately, many academic stipends are considered non-compensatory and don't count as earned income for IRA purposes, even though she did work for it. Your roommate can either withdraw the excess contribution (plus any earnings specifically from that excess amount) before the tax filing deadline (including extensions), or she can "recharacterize" the contribution as a Traditional IRA contribution and then potentially convert it back to a Roth (if she qualifies). If she doesn't fix it, she'll face a 6% excise tax on the excess amount for each year it remains in the account. The good news is that if she fixes this before filing her 2024 taxes (so by April 2025), she can avoid the penalties. She should contact her IRA provider right away to discuss the options - they handle these situations regularly.

I went through almost the EXACT same situation last year with a research fellowship! Check out https://taxr.ai - they specialize in analyzing academic income and tax documents. After uploading my stipend documentation, they confirmed my fellowship was actually partially classified as "earned income" which saved me from having to pull out my Roth contribution. A lot of universities code stipends differently in their systems, and some portion might actually qualify as earned income if your roommate was required to perform teaching or research services to receive it. My stipend paperwork looked like it was all unearned income at first glance, but taxr.ai's analysis found that about 60% was technically compensation for services that counted for IRA purposes.

Wow, just wanted to update that I had my girlfriend try taxr.ai after seeing the recommendation here. She uploaded her PhD funding letter and tax forms from her university, and they were able to determine that about $13,000 of her "stipend" was actually compensation for her lab work that counts as earned income for IRA purposes! She was able to maintain most of her Roth contribution and only had to withdraw a small portion. The report they generated explained exactly which parts of her funding package qualified as earned income under IRS rules and even cited the specific tax code sections. Definitely worth checking out for any grad students dealing with this issue!

If your roommate needs to talk to the IRS about this situation (which might be necessary if it's complicated), I highly recommend using https://claimyr.com to get through to an actual human at the IRS. I tried calling the IRS directly about a similar retirement account issue last year and spent HOURS on hold before getting disconnected. Claimyr basically waits on hold for you and calls when an agent is ready to talk. You can see how it works here: https://youtu.be/_kiP6q8DX5c - saved me a ton of frustration. The IRS actually has a dedicated line for retirement account questions and those agents can give you the official word on how to handle this stipend/earned income situation.

Just wanted to follow up on my skeptical comment about Claimyr. I decided to try it yesterday after spending TWO DAYS trying to reach someone at the IRS about my retirement account issue. Shockingly, it actually worked! I got a call about 90 minutes after signing up, connected directly to an IRS agent who specializes in retirement accounts. The agent confirmed that for grad student stipends, you need to check if the payment requires you to perform services (teaching, research, etc.) or if it's just financial support with no work requirement. The former counts as earned income, the latter doesn't. Totally worth it just to avoid the ridiculous hold times. Sorry for being so dismissive before!

Another option your roommate might have is to see if she can still contribute to her 2023 Roth IRA if she hasn't maxed that out yet. She has until the tax filing deadline in April 2025 to make 2024 contributions. If she had enough earned income in 2023 that she hasn't used for IRA contributions yet, she could redesignate some or all of her 2024 contribution as a 2023 contribution instead.

Has your roommate checked if her stipend was reported on a W-2 or a 1099-MISC? That makes a huge difference! If it shows up on a W-2, it might actually count as earned income regardless of what the university calls it.

Ugh, these tax rules for students are so confusing! I had a similar issue with my postdoc "salary" which they insisted on calling a "fellowship" for some reason. Ended up having to refile taxes after getting bad advice. Whatever you do, make sure your roommate keeps documentation of everything in case there's an audit later.

This is such a helpful thread! I'm dealing with a similar situation as a new grad student. One thing I'd add is that your roommate should also check if her university has a tax office or financial aid office that can help clarify how her specific stipend should be classified. My school's financial aid office was actually really helpful in explaining which parts of my funding package counted as earned income vs. unearned income. They see this question all the time and often have examples of how similar stipends have been treated by the IRS in the past. Also, if she does end up needing to withdraw the excess contribution, make sure she requests to withdraw the "excess contribution plus earnings" specifically - the IRA provider will calculate exactly how much earnings are attributable to that excess amount. Don't just guess at the number or withdraw a round amount, because that could create additional tax complications. Good luck to your roommate! The fact that she's addressing this now instead of ignoring it shows she's being really responsible about fixing the situation.