Confused about IRA deduction Limts

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bobsmith
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Confused about IRA deduction Limts

Post by bobsmith » Thu Nov 16, 2017 2:07 pm

I'm a little confused by the IRA deduction limit. So if I'm married filing jointly, and I participate in a state pension plan through my employer while also participating in my employers 403b plan, how is my (traditional non-roth) IRA contribution affected? I meet all the typical IRA requirements. Say my wife and I each want to max out our IRAs in 2017, which for our age is $5,500 each. I understand that if our income is more than $119,000 (2017) then our ability to deduct the IRA begins to phase out.

#1. First, I get confused about what Modified AGI is. Say our combined income is 155k, but we contribute 10K to a 403b plan. Then, we claim the standard deduction and two personal exemptions ($12,700 + $4050 x2 = $20,800). So is my Modified AGI 145k? (155K-10K) or is my Modified AGI 124.2k? (155k-10k-20.8k) Or is my Modified AGI something else?

#2. Is it fair to say that regardless of whether or not my IRA contribution is deductible, I'm still allowed to make the max contribution for each of us (assuming all the other criteria are met for contributions)? If so, WHY would anyone want to make an IRA contribution if it WAS NOT deductible? Wouldn't you just be paying taxes twice on that income? If you can't report the contribution on your taxes, then aren't you investing after-tax money in the IRA only to pay tax on it again later when you take it out (during retirement)? Wouldn't you just do a Roth IRA instead?

#3. I believe I understand the concept of a backdoor Roth, contributing to a traditional IRA, then converting it to a Roth and paying the tax. I've read some people advocate for this in cases where the IRA contribution isn't deductible. As it relates to phased out IRA deductions, how would a backdoor Roth be of any benefit?

I'm sure I'm missing something pretty fundamental here. Thanks for helping me understand.

2017 IRA Deduction Limits - Effect of Modified AGI on Deduction if You Are Covered by a Retirement Plan at Work
https://www.irs.gov/retirement-plans/20 ... an-at-work

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BL
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Re: Confused about IRA deduction Limts

Post by BL » Thu Nov 16, 2017 2:24 pm

bobsmith wrote:
Thu Nov 16, 2017 2:07 pm
I'm a little confused by the IRA deduction limit. So if I'm married filing jointly, and I participate in a state pension plan through my employer while also participating in my employers 403b plan, how is my (traditional non-roth) IRA contribution affected? I meet all the typical IRA requirements. Say my wife and I each want to max out our IRAs in 2017, which for our age is $5,500 each. I understand that if our income is more than $119,000 (2017) then our ability to deduct the IRA begins to phase out.

#1. First, I get confused about what Modified AGI is. Say our combined income is 155k, but we contribute 10K to a 403b plan. Then, we claim the standard deduction and two personal exemptions ($12,700 + $4050 x2 = $20,800). So is my Modified AGI 145k? (155K-10K) or is my Modified AGI 124.2k? (155k-10k-20.8k) Or is my Modified AGI something else?
AFAIK, it is 145k. Why not fill your 401ks or similar work plans which have no such limits?

#2. Is it fair to say that regardless of whether or not my IRA contribution is deductible, I'm still allowed to make the max contribution for each of us (assuming all the other criteria are met for contributions)? If so, WHY would anyone want to make an IRA contribution if it WAS NOT deductible? Wouldn't you just be paying taxes twice on that income? If you can't report the contribution on your taxes, then aren't you investing after-tax money in the IRA only to pay tax on it again later when you take it out (during retirement)? Wouldn't you just do a Roth IRA instead?

Don't contribute unless it is a step toward backdoor Roth IRA, if needed.

#3. I believe I understand the concept of a backdoor Roth, contributing to a traditional IRA, then converting it to a Roth and paying the tax. I've read some people advocate for this in cases where the IRA contribution isn't deductible. As it relates to phased out IRA deductions, how would a backdoor Roth be of any benefit?

If you are not phased out of Roth, make a direct contribution.

I'm sure I'm missing something pretty fundamental here. Thanks for helping me understand.

2017 IRA Deduction Limits - Effect of Modified AGI on Deduction if You Are Covered by a Retirement Plan at Work
https://www.irs.gov/retirement-plans/20 ... an-at-work

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FiveK
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Re: Confused about IRA deduction Limts

Post by FiveK » Thu Nov 16, 2017 2:25 pm

bobsmith wrote:
Thu Nov 16, 2017 2:07 pm
#1. First, I get confused about what Modified AGI is. Say our combined income is 155k, but we contribute 10K to a 403b plan. Then, we claim the standard deduction and two personal exemptions ($12,700 + $4050 x2 = $20,800). So is my Modified AGI 145k? (155K-10K) or is my Modified AGI 124.2k? (155k-10k-20.8k) Or is my Modified AGI something else?
Your MAGI calculation for traditional IRA purposes is https://www.irs.gov/publications/p590a/ ... k100025076. Standard deduction and exemptions are irrelevant, so the short answer is 145k (155K-10K).
#2. Is it fair to say that regardless of whether or not my IRA contribution is deductible, I'm still allowed to make the max contribution for each of us (assuming all the other criteria are met for contributions)? If so, WHY would anyone want to make an IRA contribution if it WAS NOT deductible? Wouldn't you just be paying taxes twice on that income? If you can't report the contribution on your taxes, then aren't you investing after-tax money in the IRA only to pay tax on it again later when you take it out (during retirement)? Wouldn't you just do a Roth IRA instead?
Yes, you would do a straightforward Roth - unless your income is too high: https://www.irs.gov/retirement-plans/am ... e-for-2017.
#3. I believe I understand the concept of a backdoor Roth, contributing to a traditional IRA, then converting it to a Roth and paying the tax. I've read some people advocate for this in cases where the IRA contribution isn't deductible. As it relates to phased out IRA deductions, how would a backdoor Roth be of any benefit?
For those people with income too high for the straightforward Roth, due to the limits linked above in #2.

Does all that make sense?

DSInvestor
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Re: Confused about IRA deduction Limts

Post by DSInvestor » Thu Nov 16, 2017 2:41 pm

Is your wife covered by an employer plan? If not, there is a higher MAGI limit for the non-covered spouse.

See IRS Page on 2017 IRA deduction limits effect on Modified AGI on Deduction if you are NOT covered by a retirement plan at work:
https://www.irs.gov/retirement-plans/20 ... an-at-work

For married filing jointly who is not covered by an employer plan but whose spouse is covered by an employer plan can take full TIRA deduction if MAGI < 186K.

Your MAGI is too high for you to take the TIRA deduction but you can do a direct Roth IRA contribution. No need to use the backdoor into Roth IRA. Your wife should be able to take the full TIRA deduction if your AGI is around 150K.

If you want more deductions for traditional contributions, consider increasing your 403b contributions up to 18K (24K for age 50+). 401k/403b/457b deductions are not subject to MAGI limits.
Wiki

bobsmith
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Re: Confused about IRA deduction Limts

Post by bobsmith » Thu Nov 16, 2017 4:03 pm

FiveK wrote:
Thu Nov 16, 2017 2:25 pm
bobsmith wrote:
Thu Nov 16, 2017 2:07 pm
#1. First, I get confused about what Modified AGI is. Say our combined income is 155k, but we contribute 10K to a 403b plan. Then, we claim the standard deduction and two personal exemptions ($12,700 + $4050 x2 = $20,800). So is my Modified AGI 145k? (155K-10K) or is my Modified AGI 124.2k? (155k-10k-20.8k) Or is my Modified AGI something else?
Your MAGI calculation for traditional IRA purposes is https://www.irs.gov/publications/p590a/ ... k100025076. Standard deduction and exemptions are irrelevant, so the short answer is 145k (155K-10K).
#2. Is it fair to say that regardless of whether or not my IRA contribution is deductible, I'm still allowed to make the max contribution for each of us (assuming all the other criteria are met for contributions)? If so, WHY would anyone want to make an IRA contribution if it WAS NOT deductible? Wouldn't you just be paying taxes twice on that income? If you can't report the contribution on your taxes, then aren't you investing after-tax money in the IRA only to pay tax on it again later when you take it out (during retirement)? Wouldn't you just do a Roth IRA instead?
Yes, you would do a straightforward Roth - unless your income is too high: https://www.irs.gov/retirement-plans/am ... e-for-2017.
#3. I believe I understand the concept of a backdoor Roth, contributing to a traditional IRA, then converting it to a Roth and paying the tax. I've read some people advocate for this in cases where the IRA contribution isn't deductible. As it relates to phased out IRA deductions, how would a backdoor Roth be of any benefit?
For those people with income too high for the straightforward Roth, due to the limits linked above in #2.

Does all that make sense?
Thanks for the reply. Lots of good advice and work arounds here at the forum. Still, why would anyone want to make a Traditional IRA contribution if they couldn't deduct it? It seems you're allowed to do the full amount even if you can only deduct a portion of it, or am I wrong about that?

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FiveK
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Re: Confused about IRA deduction Limts

Post by FiveK » Thu Nov 16, 2017 4:10 pm

bobsmith wrote:
Thu Nov 16, 2017 4:03 pm
Still, why would anyone want to make a Traditional IRA contribution if they couldn't deduct it?
For the vast majority, unless this is merely the first step in a backdoor Roth, it would indeed not be a good idea. See https://www.bogleheads.org/wiki/Non-ded ... tional_IRA for more.

If it is the first step in a backdoor Roth, it's a fine idea.
It seems you're allowed to do the full amount even if you can only deduct a portion of it, or am I wrong about that?
You are not wrong.

In that case, probably the best approach is to put the deductible amount into traditional, and the remainder into Roth.

wsm111
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Re: Confused about IRA deduction Limts

Post by wsm111 » Thu Nov 16, 2017 4:18 pm

I'd like more clarification on this as well, if someone knows.
If our MAGI is > $196k, I am covered and contribute to a retirement plan at work, but my spouse has no retirement plan at work --- or does not work -- is there a mechanism to contribute to an IRA or other tax-efficient retirement vehicle which would be in my spouse's name?
Based on the above links, it sounds like the only option is to make after tax contributions to a traditional IRA, which would then be taxed upon distributions -- not at all tax efficient.

Pigeye Brewster
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Re: Confused about IRA deduction Limts

Post by Pigeye Brewster » Thu Nov 16, 2017 4:36 pm

wsm111 wrote:
Thu Nov 16, 2017 4:18 pm
I'd like more clarification on this as well, if someone knows.
If our MAGI is > $196k, I am covered and contribute to a retirement plan at work, but my spouse has no retirement plan at work --- or does not work -- is there a mechanism to contribute to an IRA or other tax-efficient retirement vehicle which would be in my spouse's name?
Based on the above links, it sounds like the only option is to make after tax contributions to a traditional IRA, which would then be taxed upon distributions -- not at all tax efficient.
For MFJ couples, the phase-out range ($184k to $194k) applies both for 1) Roth IRA contributions and 2) for a non-working taxpayer whose spouse is covered by a plan at work for Traditional IRA.

I agree that after-tax Traditional IRA is not as desirable as taxable account.

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FiveK
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Re: Confused about IRA deduction Limts

Post by FiveK » Thu Nov 16, 2017 5:47 pm

Pigeye Brewster wrote:
Thu Nov 16, 2017 4:36 pm
For MFJ couples, the phase-out range ($184k to $194k) applies both for 1) Roth IRA contributions and 2) for a non-working taxpayer whose spouse is covered by a plan at work for Traditional IRA.
+1

See https://www.irs.gov/retirement-plans/ir ... ion-limits for the official version.

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Duckie
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Re: Confused about IRA deduction Limts

Post by Duckie » Thu Nov 16, 2017 5:55 pm

bobsmith wrote:Still, why would anyone want to make a Traditional IRA contribution if they couldn't deduct it? It seems you're allowed to do the full amount even if you can only deduct a portion of it, or am I wrong about that?
Person X makes too much to contribute to a Roth IRA but can't use the backdoor method right now because he has a large rollover IRA and his current 401k plan doesn't allow incoming rollovers. He chooses to make non-deductible contributions to his TIRA with the hope/expectation that he'll have a future job with a retirement plan that will allow incoming rollovers or perhaps he'll get some side income and can open a solo 401k which allows incoming rollovers.

For years before Roth accounts existed I made non-deductible contributions to a TIRA because I wanted to shelter more assets. I knew the 8606 would be a hassle when I took withdrawals but it was worth it to me at the time. (After Roths were created it definitely turned out to be worth it.)

bobsmith
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Re: Confused about IRA deduction Limts

Post by bobsmith » Thu Nov 16, 2017 7:41 pm

Duckie wrote:
Thu Nov 16, 2017 5:55 pm
bobsmith wrote:Still, why would anyone want to make a Traditional IRA contribution if they couldn't deduct it? It seems you're allowed to do the full amount even if you can only deduct a portion of it, or am I wrong about that?
Person X makes too much to contribute to a Roth IRA but can't use the backdoor method right now because he has a large rollover IRA and his current 401k plan doesn't allow incoming rollovers. He chooses to make non-deductible contributions to his TIRA with the hope/expectation that he'll have a future job with a retirement plan that will allow incoming rollovers or perhaps he'll get some side income and can open a solo 401k which allows incoming rollovers.

For years before Roth accounts existed I made non-deductible contributions to a TIRA because I wanted to shelter more assets. I knew the 8606 would be a hassle when I took withdrawals but it was worth it to me at the time. (After Roths were created it definitely turned out to be worth it.)
So... in the year you put money into your TIRA, you couldn't deduct it from your taxes and so that amount would still show up with all your other income on your W2, right? So for all intents and purposes you just invested in an TIRA using AFTER TAX dollars, right? Then, when you rolled it over into a Roth, you would have had to pay income taxes on it again, right? So you paid double income taxes on that investment before it finally morphed into a Roth. Correct?

bobsmith
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Re: Confused about IRA deduction Limts

Post by bobsmith » Thu Nov 16, 2017 7:51 pm

FiveK wrote:
Thu Nov 16, 2017 2:25 pm
bobsmith wrote:
Thu Nov 16, 2017 2:07 pm
#1. First, I get confused about what Modified AGI is. Say our combined income is 155k, but we contribute 10K to a 403b plan. Then, we claim the standard deduction and two personal exemptions ($12,700 + $4050 x2 = $20,800). So is my Modified AGI 145k? (155K-10K) or is my Modified AGI 124.2k? (155k-10k-20.8k) Or is my Modified AGI something else?
Your MAGI calculation for traditional IRA purposes is https://www.irs.gov/publications/p590a/ ... k100025076. Standard deduction and exemptions are irrelevant, so the short answer is 145k (155K-10K).
A little clarification. So if I had any realized capital gains, say 5K, then that also would have been added to my "Modified AGI" for TIRA purposes, right? In same example, short answer would be 150k. (155k-10k+5k) Correct?

Also, just to be crystal clear, when IRS say "covered by an employer retirement plan" this also includes 100% elective 401k and 403b plans, even those in which the employer doesn't match any of the contributions, right? Furthermore, what if I have only a 401k plan, but I don't use it at all. Am I still subject to the phase out just because such a plan exists?

https://www.irs.gov/retirement-plans/ar ... ement-plan

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FiveK
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Re: Confused about IRA deduction Limts

Post by FiveK » Thu Nov 16, 2017 8:27 pm

bobsmith wrote:
Thu Nov 16, 2017 7:41 pm
So... in the year you put money into your TIRA, you couldn't deduct it from your taxes and so that amount would still show up with all your other income on your W2, right? So for all intents and purposes you just invested in an TIRA using AFTER TAX dollars, right?
So far so good.

Meanwhile annual gains (dividends, etc.) are not taxed each year as they would be in a taxable account.
Then, when you rolled it over into a Roth, you would have had to pay income taxes on it again, right?
Only the gains, not the original contribution.
So you paid double income taxes on that investment before it finally morphed into a Roth. Correct?
No. See above.

mega317
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Re: Confused about IRA deduction Limts

Post by mega317 » Thu Nov 16, 2017 8:29 pm

FiveK wrote:
Thu Nov 16, 2017 8:27 pm
Then, when you rolled it over into a Roth, you would have had to pay income taxes on it again, right?
Only the gains, not the original contribution.
So you paid double income taxes on that investment before it finally morphed into a Roth. Correct?
No. See above.
See form 8606. This is how the IRS knows you shouldn't be taxed twice.

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FiveK
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Re: Confused about IRA deduction Limts

Post by FiveK » Thu Nov 16, 2017 8:32 pm

bobsmith wrote:
Thu Nov 16, 2017 7:51 pm
A little clarification. So if I had any realized capital gains, say 5K, then that also would have been added to my "Modified AGI" for TIRA purposes, right? In same example, short answer would be 150k. (155k-10k+5k) Correct?
Yes.
Also, just to be crystal clear, when IRS say "covered by an employer retirement plan" this also includes 100% elective 401k and 403b plans, even those in which the employer doesn't match any of the contributions, right?
Yes.
Furthermore, what if I have only a 401k plan, but I don't use it at all. Am I still subject to the phase out just because such a plan exists?
Not if neither you nor the employer contribute anything at all - in the words of the site you linked, no "contributions or forfeitures were allocated to your account for the plan year ending with or within the tax year." And you can't have a defined benefit pension.

bobsmith
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Re: Confused about IRA deduction Limts

Post by bobsmith » Fri Nov 17, 2017 9:28 am

FiveK wrote:
Thu Nov 16, 2017 8:27 pm

Meanwhile annual gains (dividends, etc.) are not taxed each year as they would be in a taxable account.
Then, when you rolled it over into a Roth, you would have had to pay income taxes on it again, right?
Only the gains, not the original contribution.
Ah, okay. Light Bulb! Thanks for your patient explanation.

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