MAGI/ ira limit question

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Topic Author
kazper
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Joined: Fri Aug 01, 2014 7:45 pm

MAGI/ ira limit question

Post by kazper »

I was putting in very rough estimates into tax act earlier today when I noticed it was not deducting for contributions to our traditional iras.

My wife had a job with a 403b but left it in august for a job with no retirement plan. With her slight bump in pay, it looks like our estimated magi will be around 125k combined.

Do I understand this right...

Because she had a 403b for part of the year it is treated as the full year
We cannot deduct ira contributions because we are over the limit
It is essentially pointless for us to contribute to a trad ira since we are not getting the initial tax break.

Any suggestions on best ways to lower magi? Any alternative steps we should take before the tax year ends?
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dodecahedron
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Re: MAGI/ ira limit question

Post by dodecahedron »

kazper wrote:
Any suggestions on best ways to lower magi?
If you are self-employed, you have lots of options. Buy new equipment for your business and take advantage of accelerated depreciation or first year writeoff provisions. Prepay business expense bills due in early January by mailing in checks in late December. If you have contract work that could be finished in late December, delay finishing it (and sending out invoice for it) until early January.

Other possibilities: Tax loss harvest (if you haven't already maxed out this year's deductible $3K loss. Anything more than that could help as a carryover in future years but not this year.) Contribute to an HSA if you have a qualifying high deductible health insurance policy. Other possibilities: hope that Congress extends some of the AGI deductions that expired last year (educator deduction, tuition & fees deduction) and see if you qualify.
Any alternative steps we should take before the tax year ends?
Consider a backdoor Roth IRA?
kaneohe
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Re: MAGI/ ira limit question

Post by kaneohe »

Front door Roth if you really can't do the TIRA deduction
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dodecahedron
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Re: MAGI/ ira limit question

Post by dodecahedron »

kaneohe wrote:Front door Roth if you really can't do the TIRA deduction
Good point--if your income is just over the deductible TIRA limit, front door Roth is a possibility to consider first. If income is also too high for front door Roth, backdoor Roth is your backup option.
Topic Author
kazper
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Re: MAGI/ ira limit question

Post by kazper »

Not Self employed and don't have an hsa :( the money is already in an ira (about 350 currently, planned on 1000 this year; roughly 1000 for me as well).

What is a "front door" roth?
kaneohe
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Re: MAGI/ ira limit question

Post by kaneohe »

a regular or normal Roth........in your case, you would have to recharacterize your existing TIRA contribution and it would be as if you had made the contribution to a Roth in the first place (talk to your broker or fund company).
Topic Author
kazper
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Re: MAGI/ ira limit question

Post by kazper »

Can anyone clarify what this statement means:

"Failure to report nondeductible contributions. If you do not report nondeductible contributions, all of the contributions to your traditional IRA will be treated like deductible contributions when withdrawn. All distributions from your IRA will be taxed unless you can show, with satisfactory evidence, that nondeductible contributions were made. "

Taken from the IRS documentation on traditional IRAs.
kaneohe
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Re: MAGI/ ira limit question

Post by kaneohe »

You need to report nondeductible contributions on this form http://www.irs.gov/pub/irs-pdf/f8606.pdf
Otherwise IRS doesn't know they are nondeductible and assumes otherwise, in which case they are taxable when withdrawn.
Topic Author
kazper
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Re: MAGI/ ira limit question

Post by kazper »

in which case they are taxable when withdrawn.
I guess this is the part I don't understand, aren't tIRA distributions always taxed when withdrawn? They're not taxed when put it (unless you're over the limit, which I may be), but are when they are withdrawn. That is the crux of my confusion. :confused
niceguy7376
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Re: MAGI/ ira limit question

Post by niceguy7376 »

TIRA can be deductible or non deductible based on income limits. If deductible, your taxable income goes down by that amount. If it is non deductible, then taxable income does now go down. I personally would NOT do a non deductible TIRA and leave it there. I would rather do a direct RIRA or use the non deductible TIRA to do backdoor ROTH.

Your first post said that you dont want to do NON DEDUCTIBLE TIRA. Hence, do RIRA.
Topic Author
kazper
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Re: MAGI/ ira limit question

Post by kazper »

Maybe I am missing the point of a nondeductible ira contribution. It would like putting money into a taxable account, except where dividends are concerned. Money is taxed when you put it in and taxed when you take it out. Sure you would save a small amount on short term dividends, but that is likely to be fairly small unless you make sizable nondeductible ira contributions.
kaneohe
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Re: MAGI/ ira limit question

Post by kaneohe »

kazper wrote:Maybe I am missing the point of a nondeductible ira contribution. It would like putting money into a taxable account, except where dividends are concerned. Money is taxed when you put it in and taxed when you take it out..................................
believe it or not, the IRS does not believe in double-taxing you. If you make a deductible contribution, it is not taxed going in but it is coming out. If you make a nondeductible contribution, it is taxed going in but not taxed coming out. Earnings which have never been taxed within the iRA are taxed coming out.

Making a nondeductible IRA contribution doesn't make much sense if you are going to invest in low cost index funds since you will be transforming what would have been LTCG into ordinary income. For those who can't move the non-basis part of the IRA into a 401K, perhaps a nondeductible contribution may make sense if investing in income generating securities since at least you get the tax deferral.
rkhusky
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Re: MAGI/ ira limit question

Post by rkhusky »

For a certain set of parameters, the non-deductible IRA is better than a taxable account. For other sets of parameters, the opposite is true. See: http://www.bogleheads.org/wiki/Non-dedu ... tional_IRA. You need to figure out your own set of parameters.
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