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

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

potatoes77 — Mon, 12 Feb 2024 22:17:01 GMT

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!

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

AnnetteB6 — Tue, 13 Feb 2024 22:41:32 GMT

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.

The diagnostic file will not contain personally identifiable information, only numbers related to your tax forms. If you would like to provide us with the diagnostic file, follow the instructions below and post the token number along with which version of TurboTax you are using and what state you a filing (if any) in a follow-up thread.

Use these steps if you are using TurboTax Online:

Sign in to your account and be sure you are in your tax return.
Select Tax Tools in the menu to the left.
Select Tools.
Select Share my file with agent.
A pop-up message will appear, select OK to send the sanitized diagnostic copy to us.
Post the token number here.

If you are using a CD/downloaded version of TurboTax, use these steps:

Select Online at the top of the screen.
Select Send Tax File to Agent.
Click OK.
Post the token number here.

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

dmertz — Wed, 14 Feb 2024 00:53:09 GMT

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.

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

potatoes77 — Thu, 15 Feb 2024 20:37:37 GMT

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.

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

potatoes77 — Thu, 15 Feb 2024 20:39:47 GMT

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!