Contribution to IRA not deductible due to MAGI being too high

[sking260]

Not sure if I'm missing a box that needs to be checked, but:

I left my job in June 2021 that had a 401(k). Upon leaving, I rolled this money into a traditional IRA due to not being eligible for a 401(k) yet at my new job. This "distribution" (rollover) increased my MAGI to over $76,000, which is the limit for contribution deduction to a traditional IRA. I contributed to my IRA after rollover, but before eligibility in my new 401(k). TurboTax is telling me my contributions to my IRA are not deductible due to the MAGI threshold and the fact that I had an employer-sponsored 401(k) during the year. Did I do something wrong or is TurboTax not collecting all the necessary information?

Thanks,

A CPA

[MaryK4 · Accepted solution]

If you were covered by an employer plan at any tine during the year, the income limits apply to your traditional IRA deduction.

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.

• IRA deduction limits

[GayleS03]

I'd recheck entries, because the amount rolled over directly from a (traditional) 401(k) to a (traditional) IRA shouldn't become part of your MAGI for this threshold. If it wasn't a direct rollover (custodian to custodian, etc.), the timing is relevant, since there is a 60 day deadline to make the rollover contribution. 

[sking260]

Thanks Gayle, I found out that the IRS doesn't care at what point in the year you were covered under an employer-sponsored 401k. It could be for 1 day or 365 days. The conversion amount (direct rollover) is included in my MAGI and disqualifies me from IRA contribution deductions. I simply made a mistake by contributing to my IRA. Good to know for the future!

[GayleS03]

I would still encourage a recheck of the coding, as I don't believe the amount directly rolled over to a traditional IRA should flow to that MAGI. I'd expect the 1099-R from the 401(k) custodian to show the amount of the distribution in box 1, $0 in box 2a and a code G in box 7 (Direct Rollover of a distribution, etc.) If yours is different, you might visit with the issuer; they're usually correct, but mistakes can happen.  (I do agree that your access to the 401(k) plan subjects you to the $66k-$76k phaseout (for Single or HOH), but was focused on the role of the rollover distribution in the math.) Don't give up too quickly.....