I'm a recipient of an undergraduate scholarship that covers full tuition and provides an additional annual stipend (paid directly to me) for general living expenses in return for employment after graduation. The sponsoring party states that I'm considered an "independent contractor", not self-employed, or employed by them.
I want to set aside a budget for myself and use some of this money to invest for my future; after some research, I've opened an IRA with plans to make monthly contributions from the stipend. However, it's been brought to my attention that these funds aren't eligible for an IRA, since I receive a 1099-MISC and not a W-2 from the sponsor.
The IRS states that
A scholarship or fellowship is tax free only to the extent:
It does not exceed your expenses;
It is not designated or earmarked for other purposes (such as room and board), and does not require (by its terms) that it cannot be used for qualified education expenses; and
It does not represent payment for teaching, research, or other services required as a condition for receiving the scholarship.
The stipend is definitely taxable as it exceeds explicitly stated qualified educational expenses on the website, so I've paid taxes already for it. Also, receiving the stipend is contingent upon my fulfillment of the employment commitment post-graduation; if I fail to honor this commitment, I am required to pay it all back.
According to the IRS:
You must include in gross income:
Amounts used for incidental expenses, such as room and board, travel, and optional equipment.
Amounts received as payments for teaching, research, or other services required as a condition for receiving the scholarship or fellowship grant. However, you do not need to include in gross income any amounts you receive for services that are required by the National Health Service Corps Scholarship Program or the Armed Forces Health Professions Scholarship and Financial Assistance Program.
My questions are:
1) Why wouldn't I be able to contribute to an IRA if it is taxable? Since I am spending the stipend on living expenses, shouldn't it count as income and thus make it eligibile for an IRA?
2) If I can't contribute to an IRA, what would be the smartest way to invest/save excess funds?