I am in a weird catch-22 situation on my spouse's Individual 401k contribution this year. Normally, I can have her contribute to her Solo 401k up to around $30K. But starting in 2022, Turbotax started automatically checking her off as "Covered by employer retirement plan", simply as a result of being self-employed. She has no employees, no other job and does not receive any W-2s.
The problem with being "covered by employer retirement plan" is that since our married filing jointly MAGI income is above the threshold of $129,000, Turbotax disallows any contribution to Traditional Individual 401k accounts. In fact, in 2022, Turbotax filed a 5329 and made me pay a 6% penalty on her $30,000 contribution. Turbotax did not warn me about this when I filed our 2022 return, but if I open 2022 Turbotax today, there is a warning.
The net result is I had to pay a 6% penalty on 5329 for 2022, and potentially another 6% in 2023. Also, I won't be able to contribute to her Individual 401k account for the forseeable future since our MAGI income will likely be above the $129,000 threshold.
I am really confused because in IRS publications and various explanations on the Web, there is not a mention of a limit for self-employed Individual 401k contributions based on AGI. For example, this IRS page: Self-Employed Individuals – Calculating Your Own Retirement-Plan Contribution and Deduction. Yet, it seems the way things work in Turbotax 2022 and 2023, no self-employed individual making over $129,000 could contribute to a solo 401k without triggering an ongoing penalty.
Where is my thinking wrong? Thanks for any help!
