Why am I paying taxes on a Roth IRA Contribution?

[cft]

I have earned income from a part time job. I put 90% of that earned income, about $8000 into the company 401K and showed that when I entered my W2. Therefore, it showed that about $1000 in Block 1 and, $8000 in Blocks 3 and 5 and about $7300 in Block 12a with code D (ret. plan box checked.)

When I later imputed my ROTH IRA contribution of $5000 in Turbo Tax, it showed that I owed about $2000 in taxes after inputting my IRA contribution.  Can you please help me understand what happened and how to fix this? My research shows that I can contribute to both a ROTH IRA and a 401K. What am I doing wrong in Turbo Tax?  Thank you very much for your support.

[AmyC]

The problem is your taxable compensation. You only have $1,000 of taxable income so that is your limit for your IRA.  The IRS Retirement Center  under IRA says:

For 2020, your total contributions to all of your traditional and Roth IRAs cannot be more than:

• $6,000 ($7,000 if you're age 50 or older), or
• your taxable compensation for the year, if your compensation was less than this dollar limit.

For 2019, the limits are the same as 2020.

You need to withdraw the excess contributions. See I accidentally made an excess contribution to a Roth IRA.

[cft]

Hi Amy,

Thank you for the information, but I don't understand. My Social Security Wages and Medicare wages are $8429.00. Isn't that my earned income for the year? Are you saying that because I put the bulk of my earnings in my company's 401K that I am now not eligible to make the $6000 contribution to a ROTH 401K? Thank you in advance for the further explanation.  

[ColeenD3]

Yes. That is correct. You can't go by Box 3 or Box 5 income.