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Will TurboTax catch if you don't have enough income for IRA contribution?

Suppose you contributed $6500 to IRA, but only had $5000 of earned income. Will TurboTax give a warning or error message? For science, I created a dummy TurboTax file, and entered those amounts. But the checks at various stages and final review did not seem to give any errors.

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Accepted Solutions
DawnC
Employee Tax Expert

Will TurboTax catch if you don't have enough income for IRA contribution?

Yes.  You should get a screen that says you can only deduct the amount of your earned income, up to $6500 and that you have a non-deductible excess contribution, see image below.  

 

You can contribute no more than $6,500 ($7,500 if you're 50 or over) to all of your traditional and Roth IRAs.  Any more than that is considered an excess contribution and will be taxed at 6% per year.   You can't contribute more than your earned income, either.

 

How do I avoid the 6% tax on excess contributions? 

 

To steer clear of the 6% tax, file a withdrawal request. Contact your financial institution and request to withdraw the excess contribution, plus earnings, by the due date of the return (including extensions).   The earnings are included as taxable income for the year the excess contribution was made.

 

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10 Replies

Will TurboTax catch if you don't have enough income for IRA contribution?

Yes it will and give you an excess contribution penalty.  You must have entered something wrong.  

Will TurboTax catch if you don't have enough income for IRA contribution?

@VolvoGirl Thank you for the reply. Hmm perhaps I'll try again with a "blank document" to confirm. I would really like to see for myself that TurboTax is catching it. 

Will TurboTax catch if you don't have enough income for IRA contribution?

There may be no warning, instead you will discover (later) that Form 5329 has been attached to your return,.

DawnC
Employee Tax Expert

Will TurboTax catch if you don't have enough income for IRA contribution?

Yes.  You should get a screen that says you can only deduct the amount of your earned income, up to $6500 and that you have a non-deductible excess contribution, see image below.  

 

You can contribute no more than $6,500 ($7,500 if you're 50 or over) to all of your traditional and Roth IRAs.  Any more than that is considered an excess contribution and will be taxed at 6% per year.   You can't contribute more than your earned income, either.

 

How do I avoid the 6% tax on excess contributions? 

 

To steer clear of the 6% tax, file a withdrawal request. Contact your financial institution and request to withdraw the excess contribution, plus earnings, by the due date of the return (including extensions).   The earnings are included as taxable income for the year the excess contribution was made.

 

**Say "Thanks" by clicking the thumb icon in a post
**Mark the post that answers your question by clicking on "Mark as Best Answer"

Will TurboTax catch if you don't have enough income for IRA contribution?

@fanfare Interesting, thank you. I will look for a generated Form 5329 as well. 

Will TurboTax catch if you don't have enough income for IRA contribution?

The 6% Excess IRA contribution penalty is on Schedule 2 line 8 which goes to 1040 line 23.  And on form 5329

https://www.irs.gov/pub/irs-pdf/f5329.pdf

Will TurboTax catch if you don't have enough income for IRA contribution?

@DawnC Thank you for testing it out and showing the image. In the initial test, I arbitrarily selected a Roth IRA contribution. So the error message "Only part of your IRA Contribution is Deductible" might not show up, since Roth contribution aren't deductible? I will test it again sometime.

Will TurboTax catch if you don't have enough income for IRA contribution?

UPDATE: I tested it again, and VolvoGirl and DawnC are correct. A ("warning") message will appear stating that there is an excess contribution (in the example of a $6500 IRA contribution with $5000 earned income). Additionally a Form 5329 is generated as fanfare mentioned. 

 

Note the initial test did not detect any errors because besides $5000 income from W-2, I forgot I also entered in $3000 for a 1099-MISC. This brought the actual total earned income to $8000-ish (minus self employment tax), which is more than the IRA contribution amount. Hence no error. I was also curious on 1099-MISC income and eligibility for IRA contributions. Apparently some 1099-MISC are eligible and some aren't, but that is a discussion for another time.

 

Thank you all that responded!

Will TurboTax catch if you don't have enough income for IRA contribution?

What was the 1099Misc for?  Self employment income usually is on a 1099NEC.   The 1099Misc didn't directly make it eligible for the IRA contribution.    What was eligible is the Net Profit on Schedule C for self employment income.  

Will TurboTax catch if you don't have enough income for IRA contribution?

The 1099 MISC was for royalties from self employment/Schedule C. Good to know it's the Net Profit on Schedule C for self employment income that is IRA eligible, and not necessarily the 1099 MISC.

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