Ways to lower my MAGI for Roth IRA purposes

[nielsbohr]

I'm right at the cusp where I earn just slightly too much to qualify for a Roth IRA. What are some ways that I can lower my MAGI? I have access to a 401(k) and HSA at work, would increasing my contributions to them lower my MAGI or not? What about selling some of my stock holdings at a loss? Am I correct in my impression that mortgage interest would not lower my MAGI for this purpose? Thanks

[NYBoglehead]

Contributing to the 401(k) would lower your MAGI for Roth purposes.

[DSInvestor]

Are you trying to qualify for 2012 Roth IRA contributions? Traditional 401(k) contributions made in 2012 will reduce 2012 AGI/MAGI. Contributions to Traditional 401 (k) in 2013 will reduce 2013 MAGI. However if you're self employed, contributions to self employed retirement plans like Solo401(k), SEP-IRA before 2012 tax filing deadline can reduce 2012 AGI/MAGI and help you qualify for 2012 Roth IRA contributions.

Capital losses realized in taxable accounts can reduce AGI and MAGI by up to $3,000/yr. If you don't have any capital loss carryovers from prior years, realizing capital losses now in 2013 will not reduce 2012 AGI/MAGI.

If you have a high deductible health plan, HSA contributions would reduce your AGI/MAGI. The deadline for 2012 HSA contributions is April 17, 2013.

Mortgage interest is an itemized deduction which does not reduce AGI/MAGI.

[momar]

Why?

http://www.bogleheads.org/wiki/Backdoor_Roth_IRA

[retiredjg]

I'm right at the cusp where I earn just slightly too much to qualify for a Roth IRA. What are some ways that I can lower my MAGI? I have access to a 401(k) and HSA at work, would increasing my contributions to them lower my MAGI or not? What about selling some of my stock holdings at a loss? Am I correct in my impression that mortgage interest would not lower my MAGI for this purpose? Thanks

Welcome to the forum!

You have access to a 401k and it appears you have not been using it. You should probably be using it to lower your taxable income regardless of whether it helps you to qualify for Roth IRA. Doing both (401k and Roth IRA) would be even better.

[nielsbohr]

Thank you all for your replies, they answered all of my questions.

As to my personal situation, I elided some details to keep the question as straightforward as possible, but here are the full details:
I was asking for my 2013 Roth IRA planning. My 2012 Roth is already fully funded, and because my raise came mid-year I was well under the income limit. I already have a traditional IRA from a traditional 401(k) rollover, so I'd rather not do the Backdoor option. I have some capital losses in taxable accounts from 2012 sales, that I haven't yet applied to my taxes. I already fully fund my work 401(k), but I do it as a Roth 401(k), which of course doesn't lower my taxable income.

I'm trying to avoid having both Roth and Traditional contributions in my 401(k), because I'm worried that it will make things harder when it comes time to roll things over into an IRA (do they let you split your Roth and Traditional contributions to the same 401(k) into separate Roth and Traditional IRAs? Does it vary by provider, perhaps?) That being the case, it sounds like my best option would be to roll-over my capital losses to next year, and then if I am still over the limit I can use my HSA contributions to bring me under.

[retiredjg]

I already fully fund my work 401(k), but I do it as a Roth 401(k), which of course doesn't lower my taxable income.

Unless you are in a VERY low tax bracket, I think most people here would say that Roth 401k is not your best choice.

I'm trying to avoid having both Roth and Traditional contributions in my 401(k), because I'm worried that it will make things harder when it comes time to roll things over into an IRA (do they let you split your Roth and Traditional contributions to the same 401(k) into separate Roth and Traditional IRAs?

Yes. It is split. No reason to avoid this at all.

Does it vary by provider, perhaps?)

I don't see how this could vary by provider.

That being the case, it sounds like my best option would be to roll-over my capital losses to next year, and then if I am still over the limit I can use my HSA contributions to bring me under.

I think your best option is to start some tax-deferred investing. Actually, I think your best option is to start A OT of tax-deferred investing. Depending on your situation, it could reduce your taxes a lot. There is no reason to pay a higher percentage of tax today than you would likely pay in retirement.

[momar]

Thank you all for your replies, they answered all of my questions.

As to my personal situation, I elided some details to keep the question as straightforward as possible, but here are the full details:
I was asking for my 2013 Roth IRA planning. My 2012 Roth is already fully funded, and because my raise came mid-year I was well under the income limit. I already have a traditional IRA from a traditional 401(k) rollover, so I'd rather not do the Backdoor option. I have some capital losses in taxable accounts from 2012 sales, that I haven't yet applied to my taxes. I already fully fund my work 401(k), but I do it as a Roth 401(k), which of course doesn't lower my taxable income.

I'm trying to avoid having both Roth and Traditional contributions in my 401(k), because I'm worried that it will make things harder when it comes time to roll things over into an IRA (do they let you split your Roth and Traditional contributions to the same 401(k) into separate Roth and Traditional IRAs? Does it vary by provider, perhaps?) That being the case, it sounds like my best option would be to roll-over my capital losses to next year, and then if I am still over the limit I can use my HSA contributions to bring me under.

Obviously depends on your plan, but have you looked into rolling your traditional IRA into your 401k?

[nielsbohr]

There's two main reasons why I'm going with the Roth: The first is that I'm sheltering effectively more money, since 17k tax free is better than 17k tax deferred; The second is that I like the fact that, if worse comes to worst, I can access my contributions to a Roth account. Having lost my job in 08 it was extremely stressful that most of my savings were behind a 10%+tax penalty that early withdrawals from a regular 401(k) would have incurred. I've since beefed up my rainy day fund, so ideally I'll never have to touch my IRA/401(k), but ideally a cruise ship doesn't need all those lifeboats either.

As for rolling the IRA into the 401(k), I like the much broader options that my IRA provides

[retiredjg]

The second is that I like the fact that, if worse comes to worst, I can access my contributions to a Roth account.

You do have access to contributions to a Roth IRA. You do not have penalty free access to contributions to Roth 401k (unless it is one of the exceptions, which would also apply to traditional 401k).

[furwut]

There's two main reasons why I'm going with the Roth: The first is that I'm sheltering effectively more money, since 17k tax free is better than 17k tax deferred; ...

Until reading this forum that was my thinking as well. Since then I've come to appreciate a couple of things:
1) When one contributes to a Roth today they pay taxes at their higher marginal rate and forgoe the opportunity to pay taxes later under the progressive scheme which almost always results in a lower tax rate.

2) In retirement one might have a great deal of income flexibility. A strategy that can be done is to keep ones taxable income low and so allow for a favorable conversion from a traditional IRA to a Roth.

I've come to believe that these two points make the traditional approach the better option for most people.

[nielsbohr]

Hmmm, both good points. Alright, so here's a question then (and sorry this is starting to drift somewhat from the original post): Let's say I have 20k in contributions each in a regular and a roth ira. If I convert all of the regular ira into the roth ira (and pay the taxes of course), does it then mean that I have 40k worth of contributions in my Roth that I could withdraw in the future tax and penalty free? Alternately, could I take out the 20k in contributions to the roth in the same year that I convert the 20k regular into the roth? If either of these is yes, then that might very well tip me over into the pre-tax camp, since I would have the flexibility I'd need to be able to get at at least some of the money if I _REALLY_ needed it.

[Bob's not my name]

Having lost my job in 08 it was extremely stressful that most of my savings were behind a 10%+tax penalty that early withdrawals from a regular 401(k) would have incurred.

If you lose your job you can roll your 401k into a TIRA, from which you can take penalty-free -- and possibly tax-free if you are unemployed -- withdrawals for certain purposes. http://thefinancebuff.com/your-traditio ... -fund.html

You actually have it backwards. Fear of unemployment is an argument for pre-tax savings, not post-tax. "I'm afraid that if I save a massive amount on taxes today while employed, I may have to pay a tiny amount of taxes later if I'm unemployed. So instead I choose to pay a massive amount of unnecessary taxes today."

[retiredjg]

Hmmm, both good points. Alright, so here's a question then (and sorry this is starting to drift somewhat from the original post)

Not a problem - it's your thread. You don't have to stay on topic, but it would be rude for the rest of us to wander too far astray.

Let's say I have 20k in contributions each in a regular and a roth ira. If I convert all of the regular ira into the roth ira (and pay the taxes of course), does it then mean that I have 40k worth of contributions in my Roth that I could withdraw in the future tax and penalty free?

No. Yes. Partly. It depends.

The $20k in ordinary Roth IRA contributions will always be available without tax or penalty. The other $20k is not so simple. (I hope I get this part right - these rules are difficult and hard to remember - I've already changed this thing 3 times as I remember different rules ).

If the contributions in the "regular" IRA were deductible, requiring tax on the conversion, that part is not immediately available without penalty (5 year clock starting January of the year you did the conversion).

If the contributions in the "regular" IRA were non-deductible and there are no earnings before the conversion (true back door), yes, that money would be available without penalty.

If the contributions in the "regular" IRA were non-deductible, that part would be available without penalty, but the earnings on the contributions would not (5 year clock) because the earnings triggered tax during the conversion.....but you have to take the part with the penalty first before you can get to the part that has no penalty.

Alternately, could I take out the 20k in contributions to the roth in the same year that I convert the 20k regular into the roth?

Yes. Roth IRA withdrawals have an order and the first thing to come out are the ordinary contributions.

http://fairmark.com/rothira/distrib.htm

If either of these is yes, then that might very well tip me over into the pre-tax camp, since I would have the flexibility I'd need to be able to get at at least some of the money if I _REALLY_ needed it.

Huh? Nothing said above affects pre-tax vs Roth inside the 401k. But perhaps, you are just talking about being more comfortable with pre-tax contributions to 401k if you can make other adjustments in other areas.

[nielsbohr]

Yes. Roth IRA withdrawals have an order and the first thing to come out are the ordinary contributions.

http://fairmark.com/rothira/distrib.htm

THANK YOU, this is exactly what I was looking for. I knew about the 5 year seasoning requirement for earnings, but didn't know how it applied to conversions.

If either of these is yes, then that might very well tip me over into the pre-tax camp, since I would have the flexibility I'd need to be able to get at at least some of the money if I _REALLY_ needed it.

Huh? Nothing said above affects pre-tax vs Roth inside the 401k. But perhaps, you are just talking about being more comfortable with pre-tax contributions to 401k if you can make other adjustments in other areas.

Sorry, I was making the assumption that the scenario in which I'd need to tap the money would also be a scenario in which I could roll over from the 401(k) into an IRA, ie a Job Loss followed by extended unemployment. I have enough of a buffer that I could cover most anything less than that by stopping my retirement contributions partially or entirely

[retiredjg]

It sounds like you do not have an adequate dedicated emergency fund. If not, I think that is something you should consider starting. Or increasing, if you do have one already.

Common suggestions here would be 3 months of expenses (for very stable job) up to a year's worth of expenses (for people in jobs that have turnover).

[nielsbohr]

Oh I've got 6 months in cash, plus another six in taxable accounts, plus however much I would get in unemployment insurance, plus some very easy luxuries to cut, so when I say extended I mean EXTENDED; I just have a bit of a 'once bitten, twice shy' mentality.

[retiredjg]

I just have a bit of a 'once bitten, twice shy' mentality.

I think that is called "wisdom".