Incorrect Calculation for Roth IRA Contribution limit based on Earned Income

[SW57]

I believe TurboTax has incorrectly calculated how much I can contribute to my Roth IRA.

My spouse and I are retired, but we have $4,140 in net business income which we split as husband and wife sole proprietors.  Each of our schedule Cs shows a profit of $2,070.  Based on our combined business income, I contributed $4,000 to my Roth IRA.  (My wife did not contribute to her IRA.)  Our MAGI is well below the limit for contributing to a Roth.  However, Turbo Tax tells me I have an excess contribution to my Roth of $2,076 and that I owe a 6% penalty of $124.  

TurboTax calculates my limit as follows:

The Earned Income worksheet divides our business income between Taxpayer and Spouse ($2,070 each) and then deducts one-half of self-employment tax ($146 each)  showing earned income for each of us as $1,924.  This is the figure Turbo Tax uses to set my Roth contribution limit.  However, shouldn't the combined amount of $4,140 which is our Earned Income as a couple be the amount that determines what our total Roth contribution can be?

I can override the totals on the worksheets to eliminate the excess contribution and penalty, but I want to make sure that I am correct.  Also, if this is the case Turbo Tax should correct how the numbers flow from the worksheets.

[dmertz · Accepted solution]

TurboTax is correct.  Only the spouse with lower compensation can use the other spouse's compensation to support an IRA contribution.  Since both of you have the same compensation, neither of you is eligible to use the other's compensation to support an IRA contribution.

Further, your net earnings eligible to support an IRA contribution are net profit minus the deductible portion of self-employment taxes.  With each of you having $2070 of net profit, each of you is eligible to contribute to a Roth IRA a maximum of $1,924.

To avoid an early-distribution penalty, by the due date of your tax return you must obtain an explicit return of the $2,076 excess contribution.

To maximize combined retirement savings, your wife can contribute $1,924 to her Roth IRA.

[SW57]

Thanks so much for your reply!