401k contributions after retirement

[oarcaute]

In the Federal Taxes Deductions & Credits section in TurboTax Deluxe I need guidance with the Retirement and Investments category and specifically with Traditional and Roth IRA contributions section.  I'm ok with the first 4 responses requested in the software but  I am confused with the fifth one: "Retirent Plan Coverage". I am totally retired and in addition to Social SecurityI also have a retirement benefits from my years in education.  I continue to contribute to my traditional IRA every month (no contributions to Roth IRA's). The question in TurboTax wants me to answer is "Are you covered by a retirement plan at work?". To me the answer is that I was covered when I was working but I no longer work anywhere and as a result I think my answer here should be no. Any guidance would be greatly appreciated.

[MaryK4]

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.  The question is asking for this tax year.  

[Opus 17]

You can’t contribute to an IRA unless you have compensation from working. Compensation includes wages, self-employment income on schedule C, and a few other minor categories of income. But if you are completely retired and don’t work, you can’t contribute to an IRA or a Roth IRA.

[VolvoGirl]

Yeah you might have a big problem if you've been contributing to your IRA since you retired.  When did you retire?  You may need to amend prior year returns.   Or it shouldn't let you enter any contributions if you didn't have any earned income from a current job.  You will have a penalty for excess contributions.  

[oarcaute]

I officially retired from any employment (part time or full time) at the end of August 2021.

[VolvoGirl]

Ok then you could have contributed to your IRA for 2021 if you made enough on your W2.  But not for 2022.  Sorry.  You need to take your 2022 & 2023 contributions out of the IRA.

[oarcaute]

Thanks for the response.  I am tje lone participsnt on this issue (not married).  The only retirement plan I had and was contributing to was from the school district while I was working. I retired from that employer several years ago. I continue to make monthly contributions after retirement with funds from my monthly Social Security payments. The Retirement plan from the school district is my only other source of monthly income. Don't know what the income level would be or where I could find that info.

Not sure what to make of the last sentence. Should it be: The question is asking for this year's levels? Thanks again.

[oarcaute]

Thank you. I'll reach out to my investment group tomorrow and bring them up to date.

[Opus 17]

@oarcaute 

It’s important that we all understand the precise terminologies to be used and what exactly you were doing. You mentioned a 401(k), an IRA, and a retirement plan from a school district. 

401(k) plans and IRAs are completely different types of retirement accounts, they are controlled by different sections of the tax law, and have very different rules and procedures, even though they have a broadly similar purpose.  Each other type of qualified workplace retirement plan is covered by a different section of the tax law. Some of them include 403B, 401(a), and 457.

You said “I continue to make monthly contributions after retirement with funds from my monthly Social Security payments”.   It sounds like you are contributing to your workplace plan from a school district.  If so, that is not a 401(k) or an IRA.  Before we can understand the legality and the financial implications of what you have been doing, we need to understand exactly where you have been contributing your money, and exactly what kind of account it is.  For example, for certain types of deferred compensation retirement plans, you would continue to receive a W-2, even after you’re retired.  It also matters whether you have been making contributions by automatic deduction from your retirement pay or whether you have been sending checks out of pocket from your own funds.

[oarcaute]

Thank you for your reply. Much appreciated.  I'll try to clarify here. The investment account I have this money in is a regular IRA (as per my 2022 year end From 5498 from my investment advisor) , not a Roth.  The revenues I currently receive monthly are from 2 sources: Monthly Social Security and monthly retirement income that I receive as a result of my years in the education arena. I have contributed monthly to my IRA for many years and continue to do so today from my monthly Social Security revenue.  I've done my Federal and State tax returns on TurboTax for many years. In preparing my 2022 tax return I always want to properly provide all information for everything that applies to my income and expenses in 2022. Specifically what I'm currently unsure about deals with the Federal Taxes category, the Deductions & Credits subcategory and finally within the Retirement and Investment group. Entering data within the Traditional and Roth IRA Contributions sections, the first 4 sheets of this section are fine. The fifth sheet (Retirement Plan Coverage) asks the following: "Are you covered by a retirement plan at work?" I think my answer should be no since I'm totally retired and not working anywhere. I am also assuming that writing no as my answer, TurboTax will determine (since I have no income in the Wages & only a minal amount of 2021 tax refunds plus a small amount of 2022 reinvested stock dividends) that I won't qualify for any savings for my 2022 investment contributions when I complete the data entry for the Deductions & Credits section. That's how I think this works within TurboTax. I hope this is clearer now but if I'm missing something do not hesitate to let me know. Thank you !

[VolvoGirl]

You are missing the main point.  You can't keep contributing to a IRA after you stop working.  You need earned income from working W2 wages or a Net Profit from self employment income.  You will have an excess contribution penalty.   @dmertz 

[dmertz · Accepted solution]

With no income reported in box 1 of a 2022 Form W-2 (minus any amount in box 11) and no net profit from self-employment in 2022, you are not eligible to make any IRA contribution for 2022.  Any IRA contribution you have made for 2022 is an excess contribution subject to a 6% penalty every year that the excess contribution remains in your IRA.

[oarcaute]

Thank you much appreciated! I was able to confirm what you said here with my investment group this morning. One would think they should have made me aware of this in January 2022 and stop my contributions then. Apparently the only option left now is the Recharacterization of the 2022 contributions and stop any 2023 contributions. I expect a response to those actions at some point this week. At least the tax return will be correct when submitted. 

[dmertz]

To avoid penalties, excess contributions due to having no supporting compensation require an explicit Return of Contribution before the due date of your tax return, not a regular distribution and not a recharacterization.

[oarcaute]

Thanks for the response. Today we submitted a Removal of Excees Contribution form for the total amount of my 2022 contributions. Those funds will be sent directly to my bank and I am anticipating that should be done within a 2 week period. That being said my Federal Tax Return for 2022 won't be submitted until I receive notification that the Removal of Excess Contribution has been completed.