MAGI calculation and deductible IRA contribution

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Topic Author
aiyuanuc
Posts: 26
Joined: Fri May 03, 2019 8:16 am

MAGI calculation and deductible IRA contribution

Post by aiyuanuc » Sun Dec 01, 2019 8:26 pm

Hi BHs,

I have been searching and reading online regarding my questions below. Could you please critique what I am missing? Thanks.

1. Given 135k gross income MFJ, 19k 401k contribution, 5.4k HSA contribution, and 2.4k pre-tax insurance (offered by employer) premium, is my MAGI 135 - 19 - 5.4 - 2.4 = 108.2k?

2. Since 108.2k falls between the 103k and 123k range for deductible IRA contribution, what is our contribution limit for deductible IRA?

3. Is the limit in Question 2 person person or combined?

4. Does it make sense to just forget about deductible IRA and go with Roth given the 22% Fed and 6.5% state tax?

Thank you so much for the responses! Happy holidays!

billfromct
Posts: 1012
Joined: Tue Dec 03, 2013 9:05 am

Re: MAGI calculation and deductible IRA contribution

Post by billfromct » Sun Dec 01, 2019 8:53 pm

I would say to go with Roth IRAs for both you & your spouse.

You don't give your age, but you need to build some Roth retirement savings.

Roth retirement accounts were not available until later in my career (low/mid 50s). I have maxed out my Roth IRA since inception in 1998 & my retirement accounts are about 94% taxable/6% Roth.

Now that I'm taking RMDs & SS, those retirement payments have pushed me up 1 tax bracket compared to when I was working & up a few brackets for the Medicare penalty (IRMAA).

I wish Roth 401k's were available earlier in my career when I was in lower tax bracket & had many years to compound tax free & could be taken out state & Federal tax free after age 59.5.

bill

Topic Author
aiyuanuc
Posts: 26
Joined: Fri May 03, 2019 8:16 am

Re: MAGI calculation and deductible IRA contribution

Post by aiyuanuc » Sun Dec 01, 2019 9:03 pm

Thanks Bill.

We are 30/28 yo. I understand that Roth can be a better choice because of 1) the tax-free growth, 2) the current low tax rate, and 3) potential RMD in retirement.

But my questions to you are:
regarding 2) above: Is 22% + 6.5% really low enough to justify paying taxes upfront?
regarding 3) above: I have 20k in 401k, but do plan to max it out by putting 30k/year self+spouse combined from now on. Is RMD really gonna be a big tax hit after 30 years?

Thanks,
aiyuan
billfromct wrote:
Sun Dec 01, 2019 8:53 pm
I would say to go with Roth IRAs for both you & your spouse.

You don't give your age, but you need to build some Roth retirement savings.

Roth retirement accounts were not available until later in my career (low/mid 50s). I have maxed out my Roth IRA since inception in 1998 & my retirement accounts are about 94% taxable/6% Roth.

Now that I'm taking RMDs & SS, those retirement payments have pushed me up 1 tax bracket compared to when I was working & up a few brackets for the Medicare penalty (IRMAA).

I wish Roth 401k's were available earlier in my career when I was in lower tax bracket & had many years to compound tax free & could be taken out state & Federal tax free after age 59.5.

bill

HomeStretch
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Re: MAGI calculation and deductible IRA contribution

Post by HomeStretch » Sun Dec 01, 2019 10:03 pm

aiyuanuc wrote:
Sun Dec 01, 2019 9:03 pm
... I understand that Roth can be a better choice because of 1) the tax-free growth, 2) the current low tax rate, and 3) potential RMD in retirement.

... Is 22% + 6.5% really low enough to justify paying taxes upfront?
If you or spouse are covered by a workplace retirement plan and have a joint MAGI of $108.2k, you are in the phase-out range for the amount of a traditional IRA contribution that you can each deduct for tax purposes. See the links in this IRS page on how to calculate the amount that would be deductible or use tax prep software:
https://www.irs.gov/retirement-plans/ir ... ion-limits

If your current marginal tax rate(s) is higher than your projected rate(s) when you take plan distributions in retirement, then traditional pretax contributions make sense. If current rates are lower than projected retirement rates, then Roth makes sense. If you are currently making pretax 401k contributions, then consider making Roth IRA contributions for tax diversification of your accounts.

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FiveK
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Re: MAGI calculation and deductible IRA contribution

Post by FiveK » Sun Dec 01, 2019 10:07 pm

aiyuanuc wrote:
Sun Dec 01, 2019 8:26 pm
Hi BHs,

I have been searching and reading online regarding my questions below. Could you please critique what I am missing? Thanks.

1. Given 135k gross income MFJ, 19k 401k contribution, 5.4k HSA contribution, and 2.4k pre-tax insurance (offered by employer) premium, is my MAGI 135 - 19 - 5.4 - 2.4 = 108.2k?

2. Since 108.2k falls between the 103k and 123k range for deductible IRA contribution, what is our contribution limit for deductible IRA?

3. Is the limit in Question 2 person person or combined?

4. Does it make sense to just forget about deductible IRA and go with Roth given the 22% Fed and 6.5% state tax?

Thank you so much for the responses! Happy holidays!
1. Assuming it is the MAGI for traditional IRA purposes, yes.

2. $8,880

3. Combined

4. Depends on your expectation for withdrawal marginal tax rates vs. the 28.5% you could save on the first approx. $5K of a tIRA contribution. Beyond that you would be in the 12% federal bracket, so putting the remaining $7K in Roth is probably worthwhile regardless of what you do with the first $5K.

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FiveK
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Re: MAGI calculation and deductible IRA contribution

Post by FiveK » Sun Dec 01, 2019 10:18 pm

aiyuanuc wrote:
Sun Dec 01, 2019 9:03 pm
We are 30/28 yo. I understand that Roth can be a better choice because of 1) the tax-free growth, 2) the current low tax rate, and 3) potential RMD in retirement.
#1 is irrelevant in the simplest situation.
#2 and #3 are intertwined - see below.
But my questions to you are:
regarding 2) above: Is 22% + 6.5% really low enough to justify paying taxes upfront?
regarding 3) above: I have 20k in 401k, but do plan to max it out by putting 30k/year self+spouse combined from now on. Is RMD really gonna be a big tax hit after 30 years?
At 4%/yr real return, that would give a $1.75 million balance after 30 years. With current tax rates, a 5.9%/yr withdrawal rate would keep you in the 12% federal bracket if that is the only income.

tesuzuki2002
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Re: MAGI calculation and deductible IRA contribution

Post by tesuzuki2002 » Sun Dec 01, 2019 10:35 pm

aiyuanuc wrote:
Sun Dec 01, 2019 8:26 pm
Hi BHs,

I have been searching and reading online regarding my questions below. Could you please critique what I am missing? Thanks.

1. Given 135k gross income MFJ, 19k 401k contribution, 5.4k HSA contribution, and 2.4k pre-tax insurance (offered by employer) premium, is my MAGI 135 - 19 - 5.4 - 2.4 = 108.2k?

2. Since 108.2k falls between the 103k and 123k range for deductible IRA contribution, what is our contribution limit for deductible IRA?

3. Is the limit in Question 2 person person or combined?

4. Does it make sense to just forget about deductible IRA and go with Roth given the 22% Fed and 6.5% state tax?

Thank you so much for the responses! Happy holidays!
It is a personal choice. However, I have done a Roth Ira for the past 10 years.. and will continue to do so...

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tfb
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Re: MAGI calculation and deductible IRA contribution

Post by tfb » Mon Dec 02, 2019 10:37 am

FiveK wrote:
Sun Dec 01, 2019 10:07 pm
aiyuanuc wrote:
Sun Dec 01, 2019 8:26 pm
Hi BHs,

I have been searching and reading online regarding my questions below. Could you please critique what I am missing? Thanks.

1. Given 135k gross income MFJ, 19k 401k contribution, 5.4k HSA contribution, and 2.4k pre-tax insurance (offered by employer) premium, is my MAGI 135 - 19 - 5.4 - 2.4 = 108.2k?

2. Since 108.2k falls between the 103k and 123k range for deductible IRA contribution, what is our contribution limit for deductible IRA?

3. Is the limit in Question 2 person person or combined?

4. Does it make sense to just forget about deductible IRA and go with Roth given the 22% Fed and 6.5% state tax?

Thank you so much for the responses! Happy holidays!
1. Assuming it is the MAGI for traditional IRA purposes, yes.

2. $8,880

3. Combined

4. Depends on your expectation for withdrawal marginal tax rates vs. the 28.5% you could save on the first approx. $5K of a tIRA contribution. Beyond that you would be in the 12% federal bracket, so putting the remaining $7K in Roth is probably worthwhile regardless of what you do with the first $5K.
2. I get $6,000 * ( 1 - ($108,200 - $103,000) / ($123,000 - $103,000) ) = $4,440, which is for the person covered by the 401k plan.

3. It's per person. If your spouse isn't covered by an employer plan (because you only showed one $19k contribution), the spouse is able to make a full $6,000 deductible contribution because your MAGI is below the $193k limit.
Harry Sit, taking a break from the forums.

Topic Author
aiyuanuc
Posts: 26
Joined: Fri May 03, 2019 8:16 am

Re: MAGI calculation and deductible IRA contribution

Post by aiyuanuc » Mon Dec 02, 2019 10:46 am

Thanks tfb!

My wife just started to work part-time in retail from Nov. expected wage is around $2800. Since her workplace does offer a Fido 401k, we have opened an account in anticipation of contributing $700 to it this year. Seems that we can only contribute $5000 (combined) to the deductible IRA anyway, so opening wife's 401k shouldn't do any damage. is that right?
tfb wrote:
Mon Dec 02, 2019 10:37 am
FiveK wrote:
Sun Dec 01, 2019 10:07 pm
aiyuanuc wrote:
Sun Dec 01, 2019 8:26 pm
Hi BHs,

I have been searching and reading online regarding my questions below. Could you please critique what I am missing? Thanks.

1. Given 135k gross income MFJ, 19k 401k contribution, 5.4k HSA contribution, and 2.4k pre-tax insurance (offered by employer) premium, is my MAGI 135 - 19 - 5.4 - 2.4 = 108.2k?

2. Since 108.2k falls between the 103k and 123k range for deductible IRA contribution, what is our contribution limit for deductible IRA?

3. Is the limit in Question 2 person person or combined?

4. Does it make sense to just forget about deductible IRA and go with Roth given the 22% Fed and 6.5% state tax?

Thank you so much for the responses! Happy holidays!
1. Assuming it is the MAGI for traditional IRA purposes, yes.

2. $8,880

3. Combined

4. Depends on your expectation for withdrawal marginal tax rates vs. the 28.5% you could save on the first approx. $5K of a tIRA contribution. Beyond that you would be in the 12% federal bracket, so putting the remaining $7K in Roth is probably worthwhile regardless of what you do with the first $5K.
2. I get $6,000 * ( 1 - ($108,200 - $103,000) / ($123,000 - $103,000) ) = $4,440, which is for the person covered by the 401k plan.

3. It's per person. If your spouse isn't covered by an employer plan (because you only showed one $19k contribution), the spouse is able to make a full $6,000 deductible contribution because your MAGI is below the $193k limit.

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tfb
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Re: MAGI calculation and deductible IRA contribution

Post by tfb » Mon Dec 02, 2019 10:55 am

aiyuanuc wrote:
Mon Dec 02, 2019 10:46 am
Thanks tfb!

My wife just started to work part-time in retail from Nov. expected wage is around $2800. Since her workplace does offer a Fido 401k, we have opened an account in anticipation of contributing $700 to it this year. Seems that we can only contribute $5000 (combined) to the deductible IRA anyway, so opening wife's 401k shouldn't do any damage. is that right?
In that case the limit is $4,440 per person. FiveK suggested $5,000 combined based on your tax bracket. You can choose to contribute more or less, but no more than $4,440 to each person's Traditional IRA.
Harry Sit, taking a break from the forums.

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FiveK
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Re: MAGI calculation and deductible IRA contribution

Post by FiveK » Mon Dec 02, 2019 11:47 am

tfb is correct that the $8,880 combined is really $4,440 per person. See Worksheet 1-2 in https://www.irs.gov/pub/irs-pdf/p590a.pdf for details (that is currently the 2018 version but the concept applies).

You could contribute more than $4,440/person, but anything between that and the general 2019 limit would be a non-deductible contribution. No good reason for you to make a non-deductible contribution when you can contribute directly to a Roth with that money.

Topic Author
aiyuanuc
Posts: 26
Joined: Fri May 03, 2019 8:16 am

Re: MAGI calculation and deductible IRA contribution

Post by aiyuanuc » Mon Dec 02, 2019 12:02 pm

Since we've already contributed $6000 pp into Roth at the beginning of the year, is it advised that we calculate whatever the deductible IRA amount is and recharacterize the corresponding Roth contribution? Just wanna make sure this is doable before Apr 2020 so we are not missing anything.
FiveK wrote:
Mon Dec 02, 2019 11:47 am
tfb is correct that the $8,880 combined is really $4,440 per person. See Worksheet 1-2 in https://www.irs.gov/pub/irs-pdf/p590a.pdf for details (that is currently the 2018 version but the concept applies).

You could contribute more than $4,440/person, but anything between that and the general 2019 limit would be a non-deductible contribution. No good reason for you to make a non-deductible contribution when you can contribute directly to a Roth with that money.

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FiveK
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Re: MAGI calculation and deductible IRA contribution

Post by FiveK » Mon Dec 02, 2019 12:55 pm

aiyuanuc wrote:
Mon Dec 02, 2019 12:02 pm
Since we've already contributed $6000 pp into Roth at the beginning of the year, is it advised that we calculate whatever the deductible IRA amount is and recharacterize the corresponding Roth contribution? Just wanna make sure this is doable before Apr 2020 so we are not missing anything.
That's up to you. See IRA recharacterization for more.

You may wish to contribute to traditional no more than the amount that would drop you into the 12% federal bracket, but again that's your choice.

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