Roth IRA Contribution Requirements

[KMACK]

I have a questions regarding stock options and Roth IRA contributions. I have a divorced client whose ex-husband worked at Oracle and she received stock options in Oracle as part of the settlement.  When she exercises the options, Oracle treats the difference between the option price and the strike price as ordinary income and reports it to her on Form 1099-MISC in Box 3 (other income). They also withhold 20% in federal income tax (but no Social Security or Medicare tax).

Does the ordinary income in Box 3 of the Form 1099-MISC count as earned income for purposes of making a Roth IRA contribution for 2019?  She only has $2,400 of W-2 income and made a $7,000 Roth contribution.  ProSeries is saying she made an Excess Roth IRA contribution since it is not including the ordinary income from exercising the stock options.

Thank you.

[qbteachmt · Accepted solution]

"Does the ordinary income in Box 3 of the Form 1099-MISC count as earned income"

No. Box 3 specifically is Other Income. Not earned. Earned income would be in box 7, for being in business income as Non-employee Compensation.

"She only has $2,400 of W-2 income and made a $7,000 Roth contribution. "

That's a problem; there still is time to notify the administrator to send the overage back. There might be a bit of earnings that are taxable, or maybe not, given the current condition of the market.

"she made an Excess Roth IRA contribution since it is not including the ordinary income from exercising the stock options."

The program is right. You are confusing Taxable Income and Earned Income.

[KMACK]

Thank you some much for the reply.  You confirmed what I was thinking.  I unfortunately fell into the trap of listening to a client who said she had "done a lot of research on the internet" and was sure I was wrong.