Why, if I add the Roth IRA contribution ($6,000 for 2022), the federal tax cost is higher?

[josepnyc76]

I don´t get it. When I add my Roth IRA contribution in turbotax, the amount of taxes to pay increases. In what situation does it happen?

[fanfare]

that happens when you are not eligible to make a Roth contribution.

There is a penalty for that, and the amount you owe goes up.

[DanaB27]

It might be that you have an excess contribution, did you get a warning during the IRA contribution interview? If you have an excess contribution you will have to pay a penalty and this will increase your taxes.

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

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

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 (request the withdrawal of excess contributions):

• 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.

Please see What happens if I made an excess Roth IRA contribution for additional information.

[josepnyc76]

We are married filing together and are not making more than the limit ($204,000). Is there any other limit that I am not aware of?

[fanfare]

Always print a copy of your completed tax return for your records, and review it carefully before e-Filing.
You will need it if you are audited by the IRS, or to amend if a TurboTax update changes your return or for any other reason,

AND, to find your AGI next year.

[fanfare]

If you are eligible then you don't have to report anything on your return.

Back out what you did.
does your tax go back down?

clearly something is fishy here.

@josepnyc76 

[josepnyc76]

yes, it goes down. If I don´t add my Roth IRA contribution, it goes down. But, why does Turbotax ask for my contributions? It is charging the 6% penalty. 

[HelenC12]

Perhaps your Modified Adjusted Gross Income (MAGI) is the problem. Print out the worksheet to see how TurboTax is calculating your MAGI for a Roth IRA. To calculate your MAGI, add your Adjusted Gross Income (AGI) plus:

• student loan interest deduction,
• foreign earned income and housing exclusions,
• foreign housing deduction,
• excluded savings bond interest,
• excluded employer adoption benefits, and,
• any Traditional IRA deduction reduced by income from a conversion of an IRA to a Roth IRA or a rollover from a qualified plan to a Roth.

You may want to enter your Roth IRA contributions into TurboTax, because:

• Excess contributions to a Roth or traditional IRA might result in a tax penalty.
• You might qualify for the Saver’s Credit
• This will record your Roth IRA basis, which can be useful for future tax calculations
• Your traditional IRA contributions may be tax-deductible (the deduction may be limited if you or your spouse is covered by a retirement plan at work and your income exceeds certain levels)

[DanaB27]

Please be aware, we cannot see your return but it seems you have an excess Roth contribution and therefore you get the 6% penalty.  Do not just remove your Roth contribution entry in TurboTax if you have an excess contribution. As Tax Expert HelenC12 mentions it is best to always enter your Roth IRA contributions into TurboTax.

If you like you can send us a “diagnostic” file that has your “numbers” but not your personal information. Please make sure it has your Roth IRA contribution included.

If you would like to do this, here are the instructions for TurboTax Online: 

1. From the left menu select Tax Tools. 
2. Then select Tools below Tax Tools. 
3. A window will pop up which says Tools Center.  
4. On this screen, select Share my file with Agent. 
5. You will see a message explaining what the diagnostic copy is. Click okay through this screen and then you will get a Token number. 
6. Reply to this thread with your Token number. This will allow us to open a copy of your return without seeing any personal information.  

The instructions for TurboTax Download: 

1. On your menu bar at the very top, click "Online"
2. Select "Send Tax File to Agent"  
3. Click "Send"
4. The pop-up will have a token number
5. Reply to this thread with your Token number. This will allow us to open a copy of your return without seeing any personal information.  

We will then be able to see exactly what you are seeing and we can determine what exactly is going on in your return and provide you with a resolution.

@josepnyc76 

[josepnyc76]

Thank you. I just found it. It's an excess contribution because the amount of the contribution depends on the earned income and not from all types of income you might have (stocks, real estate, etc.)

[DanaB27]

Yes, you need taxable compensation (as mentioned in my first post) like wages, or self-employment income to make IRA contributions.

Please request with your financial institute to withdraw the excess contribution plus any earnings by the due date. Don't withhold any taxes when you make the request. Only the earnings will be taxable income in 2022.

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 click "Continue")

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

During the IRA contribution interview, on the "penalty" screen, enter that you withdrew the $6,000 excess contribution by the due date. Then TurboTax won't calculate the 6% penalty.

@josepnyc76 

[fanfare]

TT asks for value because that is used on Form 5329 to calculate your penalty.

you now have to get custodian to return contribution plus earnings if you already put those funds in your Roth.

@josepnyc76