Why is the Modified Adjusted Gross Income calculated by TurboTax different from the amount used in the maximum Roth IRA contribution worksheet?

More details: my MAGI, calculated by TT on the MAGI worksheet is $129,292. However, the MAGI used in the IRA contribution worksheet is $121,517, which is my AGI, not MAGI. Since after $125k the contribution limit should start decreasing, mine should be less than the maximum. TT did not flag that as a problem. I'm filing as single.

Please be aware, that the Modified Adjusted Gross Income for Roth IRA Purposes is differently calculated than the regular MAGI.

The Modified Adjusted Gross Income for Roth IRA Purposes deducts any income resulting from the conversion of an IRA (other than a Roth IRA) to a Roth IRA (included on Form 1040, 1040-SR, or 1040-NR, line 4b) and a rollover from a qualified retirement plan to a Roth IRA (IRS).

Please see What Is the Difference Between AGI and MAGI on Your Taxes? for additional information.

Thanks for the response, but none of the deductions that you listed apply in my case. The difference between AGI and MAGI in my case is because of rental loss.

Yes, please review Worksheet 2-1. Modified Adjusted Gross Income for Roth IRA Purposes and notice that the calculation can vary from the regular MAGI calculations.

According to the IRS, your MAGI is your AGI with the addition of the appropriate deductions, potentially including:

• Student loan interest
• One-half of self-employment tax
• Qualified tuition expenses
• Tuition and fees deduction
• Passive loss or passive income
• IRA contributions
• Non-taxable social security payments
• The exclusion for income from U.S. savings bonds
• Foreign earned income exclusion
• Foreign housing exclusion or deduction
• The exclusion under 137 for adoption expenses
• Rental losses
• Any overall loss from a publicly traded partnership 

Thanks for writing. Yes, the rental losses is why my MAGI ($129k) is different from my AGI ($121k). No issue there.

My question still remains, why wasn't this MAGI used in the maximum Roth IRA contribution worksheet? The AGI was used instead and this is wrong, isn't it?

WHY?  Because that's how Congress wrote the tax law.  See Worksheet 2-1 here:

2021 Publication 590-A (irs.gov)

IRA's were originally created to help lower and middle income workers save for retirement. That's why there are income limits.

My roth IRA contribution has been flagged as excess because MAGI calculation includes my 401k to Roth IRA conversion amount. How to fix this?

I cannot recreate the issue. TurboTax should automatically exclude the conversion according to the Worksheet 2-1. Modified Adjusted Gross Income for Roth IRA Purposes.

It would be helpful to have a TurboTax ".tax2022" file that is experiencing this issue. You can send us a “diagnostic” file that has your “numbers” but not your personal information. 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.

@Suka1 

Thanks for the quick response. This happened with my 2021 file and don't see "Send Tax File to Agent"  but screenshare code. Probably I would have to do the 2021 amendment. What's your advice, how do I send the file?

To confirm you are using TurboTax Desktop?

"Send the Tax File to Agent" should be right above "ScreenShare code" (see picture below).

You will get a token number in a pop-up. Please reply in this thread with the token number and tag me @DanaB27.

@Suka1 

When entering the code-G Form 1099-R reporting a rollover to a Roth account, TurboTax asks if the rollover was to a designated Roth account in the same 401(k) plan (an In-plan Roth Rollover) and then, if the answer to the first question is No, TurboTax asks if the rollover was instead to a Roth IRA.  Answering these questions incorrectly will result in an incorrectly calculated MAGI for the purpose of a (separate) Roth IRA contribution.

The MAGI for the purpose of a Roth IRA contribution is reduced by the amount of a taxable rollover from the traditional account in a 401(k) to a Roth IRA, but is not reduced by the amount of an In-plan Roth Rollover.

@DanaB27

This is what I see

Is your tax return open? You have to have your tax return open. Once you open your return you will see six choices: File, Edit, View, Tools, Online and Help.

Choose Online > Sent Tax File to Agent.

@Suka1 

@ErnieS0 Thanks for pointing out, it works now.

@DanaB27 Token No: 1121075

Thanks all for your time 

Thank you, I reviewed your token. It seems you selected in the follow-up questions that the funds were moved to a designated Roth account instead of a Roth IRA.  

As dmertz stated, "The MAGI for the purpose of a Roth IRA contribution is reduced by the amount of a taxable rollover from the traditional account in a 401(k) to a Roth IRA, but is not reduced by the amount of an In-plan Roth Rollover."

Please review these follow-up questions if the funds were converted to a Roth IRA instead of a designated Roth 401(k):

1. Click "Federal Taxes" on the top and select "Wages & Income"
2. Click "I'll choose what to work on"
3. Scroll down and click "Update" next to "IRA, 401(k), Pension Plan (1099-R)" 
4. On the "Your 1099-R Entries" screen click "Edit"
5. On the "Did you move this money from a 401(k) to a Roth 401(k)?" screen answer "No"
6. On the "Did you move the money to a Roth IRA?" screen answer "Yes"

"Line 2: Enter any income resulting from the conversion of an IRA (other than a Roth IRA) to a Roth IRA (included on Form 1040, 1040-SR, or 1040-NR, line 4b) and a rollover from a qualified retirement plan to a Roth IRA (included on Form 1040, 1040-SR, or 1040-NR, line 5b)" (Worksheet 2-1)

@Suka1 

Thanks! I did in-plan roth Rollover. I moved from individual 401k to 401k roth. Did i select the answers for the follow-up questions correct? So is this taxable but MAGI is not reduced by the amount? Do I have to remove the excess contribution before filing 2022 returns?

Yes, you answered the questions correctly if you made an in-plan Roth Rollover.

Yes, this will be included in your MAGI calculation for Roth IRA contributions (please see Worksheet 2-1 for details).

You will have to pay the 6% penalty on your 2021 since the excess plus earnings were not removed by the extended due date of the 2021 tax return. If you are able to make Roth IRA contributions on your 2022 tax return then you can absorb the 2021 excess otherwise you will have to pay the 6% penalty for the 2021 excess on your 2022 tax return as well. 

If you can't absorb the 2021 excess contribution on your 2022 tax return then you will remove the excess contribution for 2021 with a regular distribution (without the earnings) since you missed the deadline (extended due date of the 2021 tax return). You will receive a 2023 Form 1099-R with code J which will be entered next year on your 2023 tax return (please make sure you enter your net Roth contributions in the follow-up questions).

On your 2021 tax return when you entered the Roth contribution TurboTax automatically calculated the 6% penalty on Form 5329.

On your 2022 tax return:

1. Open your return
2. Click “Deductions &Credits” on the top
3. Click "I'll choose what to work on"
4. Scroll down to “Traditional and Roth IRA Contributions” and click “Start”
5. Select “Roth IRA”
6. On the "Do you have any Excess Roth Contributions" answer "Yes"
7. On the "Enter Excess Contributions" screen enter the total excess contribution from 2021 (if it wasn't carried over).
8. On the "How Much Excess to 2022?" screen enter how much you want to apply to 2022 (if you haven't made the max contribution for 2022).

@Suka1