Nondeductible IRA Contribution limit

[MichVan]

I am entering a Backdoor Roth.  I have entered info from my 1099R and the traditional nondeductible IRA contribution (same amount = $7,000).  I do not have an employer sponsored retirement plan and am over 55.  I keep getting a notice that the IRA worksheet is showing that my IRA nondeductible limit is $5,030.  Any idea why?

[Opus 17]

A rollover/conversion is not the same as a contribution.  The rollover is entered into Turbotax via the 1099-R only.  Delete the contribution, unless you also made a separate contribution of new funds that was not a rollover.  

Your IRA contribution is limited to the amount of your compensation from working.  Compensation is your W-2 wages plus your self-employment income minus the deductible portion of self-employment tax.  If you are semi-retired and only working part-time, your IRA eligibility may be limited by that.  

[MichVan]

Thanks for your reply! I was following the Turbo Tax directions for BackDoor Roth:

step 1. Enter the info on my 1099R under income 

step 2. Enter the IRA contribution under deductions as a nondeductible contribution. I just can’t figure out why it will not let me indicate the entire $7,000 contribution as nondeductible…

[Opus 17]

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@MichVan wrote:

Thanks for your reply! I was following the Turbo Tax directions for BackDoor Roth:

step 1. Enter the info on my 1099R under income 

step 2. Enter the IRA contribution under deductions as a nondeductible contribution. I just can’t figure out why it will not let me indicate the entire $7,000 contribution as nondeductible…

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What is your compensation (earnings from working)?

[MichVan]

$80,000

didnt think that mattered for a BackDoor Roth. Just thought limited to $7,000 at my age.

[MichVan]

Married filing jointly

[Opus 17]

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@MichVan wrote:

$80,000

didnt think that mattered for a BackDoor Roth. Just thought limited to $7,000 at my age.

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For 2023, the maximum IRA contribution is $6500, or $7500 if over age 50.  However, you can only contribute up to the amount of compensation from working, even for a backdoor Roth conversion. If your compensation is less than $7500 or $6500 then your IRA contribution will be limited.  Is $80,000 your total W-2 wages, or your income from self-employment?  What is your net income from self-employment (after expenses)--that's how your IRA limit is set. 

The only reason that I can think of that your contribution would be limited is if there is some problem with your income.  Check your W-2 box 1 wages, and box 11 for non qualified retirement plans.  Make sure you entered your W-2s correctly in Turbotax.   You may want to try deleting your W-2s and re-entering them.  Or if you didn't enter your income yet, go back and do that now.

You may need to call customer support to have someone do a screen share and look at your file to see where the limitation is coming from.  

[MichVan]

Those are good tips! Thanks for your help!

[DanaB27 · Accepted solution]

If you are in the phaseout range of the IRA deduction, then part of your traditional IRA contribution will be automatically nondeductible. Therefore, you can only choose to make the part nondeductible that is still deductible.

For example, for a $6,500 contribution if it shows that $2,250 is still deductible then you can only enter $2,250 for the “Amount of your contribution to make Nondeductible”. The rest of the contribution ($4,250) is already automatically nondeductible. Therefore, you will have a total of $6,500 nondeductible.

@MichVan 

[MichVan]

But everything I have read/been told is that a contribution limit to a BackDoor Roth for someone over 55 is $7,000 - not income dependent. Just not sure why this is so hard in Turbo Tax…??

[Opus 17]

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@MichVan wrote:

But everything I have read/been told is that a contribution limit to a BackDoor Roth for someone over 55 is $7,000 - not income dependent. Just not sure why this is so hard in Turbo Tax…??

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That's is simply wrong.  There is no such thing as a backdoor Roth IRA in the law, it is the application of rules that work together in a way that might not have been intended by Congress.

Step 1 of a "backdoor Roth IRA" is to make a non-deductible contribution to a traditional IRA.  That follows all the usual rules for IRA contributions.  Your IRA contribution can never be more than your compensation from working--that's W-2 wages, and 92% of your net profit from self-employment.  And the maximum contribution for 2023 is either $6500 (under age 50) or $7500 (age 50 or older).  

Step 2 is to do a conversion to a Roth IRA.  

[MichVan]

Okay, I made $80,000 in 2023 and am over age 50. I should be able to make a non deductible Ira contribution of $7,000, but turbo tax is limiting me to $5,030. I have gone over the 2 step BackDoor Roth instructions many times and keep hitting this roadblock!!

[Opus 17]

@MichVan 

Here, we have to go back to your income.  Something is happening to your income that I don't understand.  You may need to contact customer support, since no one on this board can see your information.

I would also like you to carefully review @DanaB27 's answer and example image.  If you are single and your income is between $73,000 and $83,000, your ability to deduct your IRA contribution is limited as a result of your income.  You can still make a non-deductible contribution, as I explained.  But by default, Turbotax will try to deduct your contribution first.  You might be getting a message that out of the $7000 you contributed, only $1970 is deductible, and the remaining $5030 is non-deductible.   What you can do in this case is tell Turbotax to make the other $1970 non-deductible as well.

(Or, you might be getting a message that only $5030 is deductible, because the other $1970 is non-deductible due to your income, but then you have the option of manually declaring that you want the remaining $5030 to be non-deductible as well.)

If that is not the answer, you need to contact customer support.