Turbotax doesn't allow a solo 401k contribution if MAGI is above $129K - will trigger 5329 penalty

[potatoes77]

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!

[AnnetteB6]

Reading your information, it could be helpful  to dig a little deeper into your situation to determine exactly what is happening in your returns.  Providing a diagnostic copy of your 2022 and 2023 tax data files would give us the information needed to do so.  

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[dmertz · Accepted solution]

A 401(k) is not an IRA.  Contributions to the solo 401(k) are not to be entered anywhere under Deductions & Credits.  It is to be entered in the business section under Wages & Income.

Contributions to the solo 401(k) do make you covered by a workplace retirement plan, so that could affect you your your spouse's eligibility to deduct an actual traditional IRA contribution.  The self-employed retirement deduction that results from the contributions to the 401(k) does reduce compensation available to support a traditional IRA contribution by you or your spouse, so it's possible insufficient supporting compensation could make one ineligible to contribute to a traditional IRA.

[potatoes77 · Accepted solution]

Yes, you've identified the problem!  I accidentally entered my spouse's individual 401k contribution twice, once under her business (correct), and once under personal IRA (wrong place).  I guess that's what happens when I took two months to complete our taxes. 🙂  Thank you.

[potatoes77]

The problem is solved now, and was due to my incorrect entry.  Thank you for your offer of help; it gives me confidence that I will complete my somewhat complex taxes successfully!