I need help with IRA contributions - TT and IRS appear to be in conflict. Help!

[stenella]

According to https://www.irs.gov/retirement-plans/plan-participant-employee/amount-of-roth-ira-contributions-that... you can make IRA contributions based on AGI (which includes dividends and interest income), however TT says that it's based on EARNED income, not AGI. Please help me understand this conflict in allowances!

[MinhT1]

There may be a misunderstanding here.

The document you refer to gives the MAGI limits for contributing to a Roth IRA.

But also your Roth IRA is limited to your compensation. and the IRS defines compensation as:

Compensation includes wages, salaries, tips, professional fees, bonuses, and other amounts received for providing personal services. It also includes commissions, self-employment income, nontaxable combat pay, military differential pay, and taxable alimony and separate maintenance payments, and taxable non-tuition fellowship and stipend payments.

Please read this IRS publication page 38 for more information.

[stenella]

Hi - that link doesn't go anywhere. When I click it, it has text about something regarding Form 480.6C and residents of Puerto Rico.

[MarilynG1]

For single taxpayers in 2022:

• You can contribute up to $6,000 to a Roth IRA, or up to $7,000 if you are 50 or older, only if your income is $129,000 or less.
• You can make a partial contribution to a Roth IRA if your income is between $129,000 and $144,000.
• Once your income tops $141,000, you are not eligible to contribute to a Roth IRA.

For married couples in 2022,

• $6,000 or $7,000 contributions can be made for each spouse, if income is under $204,000.
• The right to make contributions is gradually phased out as income rises between $204,000 and $214,000.

Here's a Worksheet for Calculating your Modified AGI.

@stenella 

[stenella]

TT says if I contribute anything, I'm overpaying and will have to pay a penalty. My MAGI is under the $129K limit.

[DanaB27]

Please be aware, there are two limits for Roth IRA contributions. 

 For 2022 the total contributions you make each year to all of your traditional IRAs  and Roth IRAs can't be more than:

• $6,000 ($7,000 if you're age 50 or older), or
• If less, your taxable compensation for the year

Also, your Roth IRA contribution may be limited based on your filing status and income. Please see  Amount of Roth IRA Contributions You Can Make for 2022

If you don't have any taxable compensation (earned income) then you cannot make any IRA contributions.

Excess contributions are taxed at 6% per year for each year the excess amounts remain in the IRA. The tax can't be more than 6% of the combined value of all your IRAs as of the end of the tax year.

To avoid the 6% tax on excess contributions, you must withdraw:

• the excess contributions from your IRA by the due date of your individual income tax return (including extensions); and
• any income earned on the excess contribution.

The earnings will be taxable on your 2022 tax return.

You will get a 2023 Form 1099-R  in 2024 with codes P and J for the withdrawal of excess contributions and earnings. This 1099-R will have to be included on your 2022 tax return and you have two options:  

• You can wait until you receive the 2023 Form 1099-R in 2024 and amend your 2022 return or
• You can report it now in your 2022 return and ignore the 1099-R when it comes unless there is Box 4 Federal Tax withholding and/or Box 14 State withholding. Then you must enter the 2023 Form 1099-R into the 2023 tax return since the withholdings are reported in the year that the tax was withheld. The 2023 code P will not do anything to the 2023 tax return but the withholdings will be applied to 2023.

To create a Form 1099-R in your 2022 return please follow the steps below:

1. Login to your TurboTax Account 
2. Click on the "Search" on the top right and type “1099-R” 
3. Click on “Jump to 1099-R”
4. Answer "Yes" to "Did you get a 1099-R in 2022?"
5. Select "I'll type it in myself"
6. Box 1 enter total distribution (contribution plus earning)
7. Box 2a enter the earnings
8. Box 7 enter J and P
9. Click "Continue"
10. On the "Which year on Form 1099-R" screen say that this is a 2023 Form 1099-R.
11. Click "Continue" after all 1099-R are entered and answer all the questions.
12. Continue until "Did you use your IRA to pay for any of these expenses?" screen and enter the amount of earnings under "Another reason" if you are over 59 1/2 (if you are under 59 1/2 and removed the excess after December 29, 2022, then enter it next to "Corrective Distributions made on or after December 31, 2022")

Please be aware, code P will say in the drop-down menu "Return of contribution taxable in 2021" but you can ignore that since the follow-up question will tell TurboTax that it will be taxable in 2022.