IRA issue/question

[caracarn]

So, I've normally been covered by a 401k at work and have not dealt with a contribution to an IRA in decades.  Recently due to a job change and not being eligible for a waiting period which amounts to 18 months, I decided I still wanted to save tax sheltered and therefore maxed out a traditional IRA for myself and my wife.  I have been working on my taxes, and knew that due to our income there would be no tax deduction for income as we far exceed the income threshold for that, but much to my chagrin I found that TaxCut was telling me that we were subject to a penalty for having over contributed.  To add to my confusion, the same situation in TurboTax did NOT result in a penalty.  I have checked ten times over to make sure I was not making any entry error in one or the other program, but if I contribute anything to the IRA in TaxCut I get tacked with the 6% penalty.  Obviously this would be stupid, and I still have time to remove this from my IRA and go back into taxable accounts, but this one has thrown me for a loop.  Since I'm not getting the tax savings for the IRA and possibly getting penalized, it would seem I should just reverse this before finishing my taxes and be done with it.  Our AGI is just over $280K to help understand if the above results make sense one way or the other.

So what great insights does the MMM community have?

[Gin1984]

So you did not contribute at all to a 401k for either your wife or yourself for any bit of 2016?  And how much did you put in for each person?

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[caracarn]

So you did not contribute at all to a 401k for either your wife or yourself for any bit of 2016?  And how much did you put in for each person?

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I apologize, that is a crucial point I left out.  I switched jobs in April, so until then I did have a 401K at the previous job I contributed to.  My wife also is eligible (i.e. Retirement Plan checkbox in box 12 on her W-2 is checked) but since she has no matching and no great investment options we have not contributed there, but yes, we did but $4,000 into my 401k before I left. 

We had put in $5,500 for each of us into the IRA in 2016.

[teen persuasion]

I hope you mean $5500 into one IRA for you, and $5500 into a different IRA for your spouse.  IRA stands for Individual retirement account - each of you need your own account.

[caracarn]

Yes, that's what I meant.  Sorry, just typing quickly when I can (and not choosing my words carefully as  result).

[terran]

Sounds like you were both eligible for an employer sponsored retirement plan in 2016 (doesn't matter if you contributed or not), so you are not eligible for a deductible IRA contribution (you are always eligible to contribute, just not to deduct), and you are over the income limit for direct roth IRA contributions. The thing to do is roll you non-deductible IRA contributions over into roth IRAs (the so called "backdoor roth").

[BrickByBrick]

Sounds like you were both eligible for an employer sponsored retirement plan in 2016 (doesn't matter if you contributed or not), so you are not eligible for a deductible IRA contribution (you are always eligible to contribute, just not to deduct), and you are over the income limit for direct roth IRA contributions. The thing to do is roll you non-deductible IRA contributions over into roth IRAs (the so called "backdoor roth").

What I was thinking.

Also - your wife has a 401k, are the investment options really that bad?  Tax-deferring your investing is still a pretty big advantage to ignore.

[caracarn]

I'll be eligible for a 401k again in July this year.   We have inquired into what her plan involves.  Her income is very low as a teacher, so we'd basically be sending nearly 50% of her income to her 401k to to cover the same contribution rate.  Since my employers have always had a match. it made the most sense to do it there.

The big question no one hit, and maybe it is because no one knows, is would there really be a 6% tax penalty?  At this point I'm leaning towards just taking it back our of the IRA and avoiding the possibility since it is just for 12-15 months and just go back to the 401k as soon as we can. 

[terran]

The big question no one hit, and maybe it is because no one knows, is would there really be a 6% tax penalty?  At this point I'm leaning towards just taking it back our of the IRA and avoiding the possibility since it is just for 12-15 months and just go back to the 401k as soon as we can. 

There is a 6% penalty on any excess contributions. If you each contributed a total of $5500 to each of your separate IRAs and no more then there should be no penalty, so you must have entered something wrong in the tax software.

Edit: Here's some info from Taxact: https://www.taxact.com/support/1280/2015/ira-or-roth-ira-excess-contributions

[MDM]

Sounds like you were both eligible for an employer sponsored retirement plan in 2016 (doesn't matter if you contributed or not)

Actually, depending on the type of plan, it does matter.  See Are You Covered by an Employer's Retirement Plan?:

Defined contribution plan (profit-sharing, 401(k), stock bonus and money purchase pension plan) and any contributions or forfeitures were allocated to your account for the plan year ending with or within the tax year;