Why does TurboTax say I do not qualify for an IRA deduction for 2016?

[macuser_22]

There could be two reasons and the interview should tell you why.  

1) You do not have the required amount of earned compensation to contribute (have you received your W-2 yet)  or enter your other earned income?

2) You are covered by a retirement plan at work and your MAGI exceeds the deduction limits.

[VolvoGirl]

Have you entered your income yet?

[GldFsh]

Yes. I'm self employed. I have an AGI. And it doesn't exceed deduction limits.

[macuser_22]

What reason does the IRA contribution interview give?

Your self employed income must have a net profit reduced by the deduction for contributions made on your behalf to retirement plans, and the deduction allowed for the deductible part of your self-employment taxes (half the SE tax).


Do you have a SIMPLE or other self-employed retirement plan?

[GldFsh]

I have a decent AGI. It's not above the threshold for my filing status. I have no spouse. I have no workplace retirement plan such as a SEP, SIMPLE or Keogh plan. I had the $5,500 I plan to contribute to my 2016 retirement NLT April 18, 2017 slated as a "Roth IRA," but if I've read IRS correctly, "Roth" IRAs are not deductible? If I instead contribute the $5,500 NLT April 18, 2017 as a "Traditional" IRA, TurboTax let's me deduct it. I just don't understand why $5,500 as a "Roth" IRA contribution cannot be deducted, but if contributed that same amount as a "Traditional" IRA contribution, TurboTax lets me deduct it.

[macuser_22]

"I just don't understand why $5,500 as a "Roth" IRA contribution cannot be deducted, but if contributed that same amount as a "Traditional" IRA contribution, TurboTax lets me deduct it."

Roth contribution are always "after-tax" and can never be deducted.   That is the major difference e between Traditional IRA's (which can be deducted) and Roth IRA's.   

With a Traditional IRA you get to deduct the contribution in the tax year that you make it. possible reducing the tax that you must pay in that year, BUT when you eventually take distributions from the Traditional IRA, the distributions are fully taxable as ordinary income.  The reasoning is that you get a tax break when you are young, all of your contributions can grow tax free, and when you retire and might be in a lower tax bracket you take distribution and pay a lower tax.

Roth IRA's on the other hand are after-tax, so while you cannot deduct now, and you might have less to invest after paying the tax, when you take distributions, they are tax free.  Over time, the  benefit of the Roth tax free distributions of a Roth (after age 59 1/2) can outweigh the tax deductible IRA, particularity if you end up in a higher tax bracket after retirement.

Which one to invest in is up to you.

[GldFsh]

Thank you!!! That resolves the confusion.

[dmertz]

If TurboTax is indicating that your traditional IRA contribution is nondeductible, it is because the information that you have entered to this point indicates that your modified AGI is above the threshold for your filing status for being able to deduct the contribution and you or your spouse is covered by a retirement plan at work.  Since you are self employed, that workplace retirement plan would be a SEP, SIMPLE or Keogh plan (including an individual 401(k)).  If you had insufficient eligible compensation, TurboTax would instead indicate that your contribution is an excess contribution rather than simply being nondeductible.

See this IRS web page regarding income thresholds:  https://www.irs.gov/retirement-plans/ira-deduction-limits

As macuser_22 indicated, net income from self-employment available to support a personal traditional IRA contribution is your net profit from self-employment minus the deductible portion of SE taxes shown on Form 1040 line 27, further reduced by any self-employed retirement contribution shown on Form 1040 line 28.

[JN25]

This is still confusing to me because the rules for the Savers Credit (formerly "retirement savings contribution credit") say you can get a deduction for Roth IRAs:

www.irs.gov/pub/irs-drop/a-01-106.pdf

I am also not over the limit and yet Turbo Tax will not give me the credit on past returns I am trying to amend.

[dmertz]

Nowhere does that reference say that you get a deduction for a Roth IRA contribution.  Tax deductions and tax credits are two different things.  If the requirements are met, you can get a tax credit (the Retirement Savings Contributions Credit) for Roth IRA contribution, not a tax deduction.