Hitting top of bracket when IRA deductions are non-deductible

Non-investing personal finance issues including insurance, credit, real estate, taxes, employment and legal issues such as trusts and wills
Post Reply
MrBeaver
Posts: 100
Joined: Tue Nov 14, 2017 4:45 pm

Hitting top of bracket when IRA deductions are non-deductible

Post by MrBeaver » Fri Feb 23, 2018 2:44 pm

I have been trying to adjust my 401k contributions so I maximize my Roth contributions (both 401k and IRA) in the 15%(2017) or 12%(2018) brackets, while keeping my usually small LTCG taxed at 0%.

In 2017, my wife had no income (babies at home), and I think I made a crucial error in my assumptions. With the market rise last year, I purposely switched my 401k contributions to pre-tax and then sold some securities to lock in the 0% rate up to the top of the 15% bracket. I planned on splitting IRA contributions between Roth/traditional to pull me back under the 15% bracket if needed. However, at the time I really didn't fully grasp the 99k MAGI IRA deductibility limit and didn't realize that while 401k contributions pull your MAGI down, IRA deductions do not.

It seems my MAGI will be ~105130, significantly over the 99k IRA deductibility limit since I participate in a 401k and only slightly over the top of the 15% bracket for me (104800).

Filing status: MFJ
Exemptions: 4 (2 children)
Itemizing: n/a - we take the standard deduction of 12.7k as our itemized deductions only totaled 12.4k last year.

Neither of us are self employed, so SEP-IRAs etc. seem to not be possible.
I have not yet made any Roth IRA or tIRA contributions for 2017.
I have already made max 2017 HSA contribution (6750) through payroll deduction.
For flexibility, my 401k plan does allow rollovers into the plan from tIRA or Roth IRA accounts and my 401k options are very good.

Questions:
  • For future reference, if our combined MAGI is above the 99k limit but my wife has income of her own and is not covered by an employer retirement plan, can she make deductible IRA contributions up to the lesser of the IRA contribution limit or her total income?
  • How do others try to 'hit' the bracket limits? Any tips on how to do year-end tax planning when you don't have all the forms yet? I'd rather have a plan for 2018 instead of getting somewhat lucky like I did this year.

User avatar
David Jay
Posts: 5062
Joined: Mon Mar 30, 2015 5:54 am
Location: Michigan

Re: Hitting top of bracket when IRA deductions are non-deductible

Post by David Jay » Fri Feb 23, 2018 8:15 pm

If you are close to the limit (or know you are over the limit), look at the “backdoor Roth”, Wiki here: https://www.bogleheads.org/wiki/Backdoor_Roth_IRA
Prediction is very difficult, especially about the future - Niels Bohr | To get the "risk premium", you really do have to take the risk - nisiprius

nanoanalyzer
Moderator
Posts: 454
Joined: Sun Sep 28, 2014 4:14 pm

Re: Hitting top of bracket when IRA deductions are non-deductible

Post by nanoanalyzer » Fri Feb 23, 2018 8:50 pm

MrBeaver wrote:
Fri Feb 23, 2018 2:44 pm
[*]How do others try to 'hit' the bracket limits? Any tips on how to do year-end tax planning when you don't have all the forms yet? I'd rather have a plan for 2018 instead of getting somewhat lucky like I did this year.
I update a spreadsheet every 2 weeks throughout the year. I usually end up back-loading contributions as a result of needing cashflow early in the year to cover all the delayed gratification from the low cashflow toward the end of the previous year. You can develop a similar system and get used to it, probably just in time for your income to rise enough to be stuck in 22% regardless of your contributions.

It seems like folks like us who target the top of 15% (now 12%) are somewhat rare around here. My previous topic on this topic fell a little flat, granted I'm not the most engaging writer: viewtopic.php?f=2&t=220404
"If you think stocks are like physics, you believe there must be smart people who can measure exactly where the Dow Jones Industrial Average will be in five months." -Morgan Housel

MrBeaver
Posts: 100
Joined: Tue Nov 14, 2017 4:45 pm

Re: Hitting top of bracket when IRA deductions are non-deductible

Post by MrBeaver » Fri Feb 23, 2018 10:05 pm

nanoanalyzer wrote:
Fri Feb 23, 2018 8:50 pm
It seems like folks like us who target the top of 15% (now 12%) are somewhat rare around here. My previous topic on this topic fell a little flat, granted I'm not the most engaging writer: viewtopic.php?f=2&t=220404
Hah, that thread is pretty epic. I think I differ from you in that my goal is to hit the top of the bracket purely for tax efficiency standpoint. I’m also keeping my lifestyle simple and expenses low, but mostly because I don’t want to become a big spender. Most of those people (some of whom I work with) just annoy me in where their priorities lie and what excites them. As you say, when it gets to the point that max 401k contributions don’t get me below the bracket limit, then all these gyrations are moot and life becomes easier, albeit with giving a higher percentage of my income to the government.

Thanks also for your suggestions of what you do. I think what I’ll do is maintain a list of ‘potential’ LTCG harvesting. Then if my year to date deductible 401k contributions are lower than potential LTCG harvesting, increase the ratio of Traditional vs Roth contributions so they match. Come December, harvest only as much as I can given my estimate, trying to account for any 1099s and estimated dividends by the end of the year.

User avatar
House Blend
Posts: 4406
Joined: Fri May 04, 2007 1:02 pm

Re: Hitting top of bracket when IRA deductions are non-deductible

Post by House Blend » Sat Feb 24, 2018 1:26 pm

MrBeaver wrote:
Fri Feb 23, 2018 2:44 pm
Questions:
  • For future reference, if our combined MAGI is above the 99k limit but my wife has income of her own and is not covered by an employer retirement plan, can she make deductible IRA contributions up to the lesser of the IRA contribution limit or her total income?
  • How do others try to 'hit' the bracket limits? Any tips on how to do year-end tax planning when you don't have all the forms yet? I'd rather have a plan for 2018 instead of getting somewhat lucky like I did this year.
You seem not to realize that

1. Your spouse can qualify for IRA contributions based on your income.
You are MFJ, so it's your joint income that matters.

2. If she was not covered by a retirement plan at her work at any point during 2017 [*] then her IRA contribution is fully deductible as long as your 2017 MFJ MAGI is below (approx) $185K (same as the level where Roth eligibility starts to phase out).

So, even for 2017, you have access to more tax advantaged space, and possibly can use spousal IRA space to create an after-the-tax-year relief valve to hit the top of the 12%/15% bracket on the nose.

[*] Obviously not if she did not work at all last year. But if she did get a W-2 for 2017, there's a check box on that form that indicates whether she was covered or not.

See Pub. 590-A for more details.

MrBeaver
Posts: 100
Joined: Tue Nov 14, 2017 4:45 pm

Re: Hitting top of bracket when IRA deductions are non-deductible

Post by MrBeaver » Mon Feb 26, 2018 2:32 pm

House Blend wrote:
Sat Feb 24, 2018 1:26 pm
You seem not to realize that

2. If she was not covered by a retirement plan at her work at any point during 2017 [*] then her IRA contribution is fully deductible as long as your 2017 MFJ MAGI is below (approx) $185K (same as the level where Roth eligibility starts to phase out).

See Pub. 590-A for more details.
Thank you!

For some reason, I had only ever seen Table 1-2 from Pub 590-A and had assumed that "if You Are Covered by a Retirement Plan at Work" applied to both filers when filing MFJ. Table 1-3 clears it up as per your information.

Post Reply