reducing MAGI for ROTH IRA

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darrel
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reducing MAGI for ROTH IRA

Post by darrel » Mon Jun 21, 2010 10:27 pm

How can I reduce my MAGI this year so that I can contribute to a Roth IRA?
I think I'll be right on the boundary of $176,000 married filing jointly due to a large bonus I received.

Will 401k contributions reduce my MAGI?
Anything else I can do (like charitable contributions)?

What happens to a ROTH IRA contributions I make this year if my MAGI ends up exceeding $176,000?

Thanks

robert2008
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Post by robert2008 » Mon Jun 21, 2010 10:56 pm

401(k) contributions will reduce your MAGI. So, if you max out your 401(k) to get your MAGI down, you will be able to contribute more to your Roth IRA.

You may also have some options with your investments. Do you have any accumulated capital losses on any shares that you own? If so, you can tax loss harvest and take up to $3000 off of your MAGI. Similarly, make sure not to sell any gains this year as that will add to your MAGI. What kind of savings or investments do you have that pay interest? If you have taxable bonds in your taxable account, you may wish to consider moving them to tax-exempt both for long-term tax savings and because the interest doesn't add into the MAGI.

Charitable deductions will not adjust the MAGI. As a rule of thumb, if you can deduct it or it doesn't show up on the front of the 1040 (i.e. not added into the line at the bottom of the page), it affects the MAGI. Anything dealt with on the back (including deductions from schedule A like charitable contributions) does not.

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grabiner
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Re: reducing MAGI for ROTH IRA

Post by grabiner » Mon Jun 21, 2010 11:05 pm

darrel wrote:How can I reduce my MAGI this year so that I can contribute to a Roth IRA?
I think I'll be right on the boundary of $176,000 married filing jointly due to a large bonus I received.
Unless you already have a Traditional IRA, you don't need to do this; make a non-deductible IRA contribution (which is allowed regardless of income), and then convert it to a Roth the next day. (If you already have a Traditional IRA, you can't convert only the non-deductible IRA.)
What happens to a ROTH IRA contributions I make this year if my MAGI ends up exceeding $176,000?
You have to withdraw them (plus earnings, which are taxed), or recharacterize the excess contribution as a Traditional IRA contribution, or pay a penalty.
Wiki David Grabiner

darrel
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Post by darrel » Mon Jun 21, 2010 11:21 pm

Thanks for the quick responses.

Will medical insurance premiums (that are paid with pretax money) reduce the MAGI?
How about flex account pretax contributions?

I have a rollover IRA (is that a traditional one?).
I don't have any taxable investments. I have a savings account but it will not earn much interest this year.

DSInvestor
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Post by DSInvestor » Mon Jun 21, 2010 11:26 pm

Contributions to Traditional 401k will reduce MAGI. If you have unrealized losses in taxable accounts, tax loss harvesting will reduce your MAGI by up to $3000/yr. Tax efficient placement of investments may help reduce interest and dividend income which reduces AGI/MAGI. Take a look at the first page of your 1040 tax return for more ideas. Anything that helps reduce your AGI will help reduce MAGI.

If you make Roth IRA contributions and find that your MAGI exceeds 176K, you have excess contributions. Here's a fairmark article on how to deal with excess contributions:
http://fairmark.com/news/08110601-exces ... bution.htm

Rollover IRAs are like Traditional IRAs and would trigger IRA prorata calculation which increases the tax cost for a Roth conversion. Form 8606 considers assets in Traditional IRA, Rollover-IRA, SEP-IRA, SIMPLE-IRA. See form 8606:
http://www.irs.gov/pub/irs-pdf/f8606.pdf

Also see this WSJ article on making non-deductible TradIRA contributions and converting to Roth IRA. Pay attention to the section called "…And Why It's Not as Easy as It Looks":
http://online.wsj.com/article/SB1000142 ... 34164.html

ickeal
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Post by ickeal » Tue Jun 22, 2010 12:40 am

darrel wrote:Thanks for the quick responses.

Will medical insurance premiums (that are paid with pretax money) reduce the MAGI?
How about flex account pretax contributions?

I have a rollover IRA (is that a traditional one?).
I don't have any taxable investments. I have a savings account but it will not earn much interest this year.
If the rollover IRA is your only pretax IRA then you can move the rollover IRA to your current 401k. Next contribute to a non-deductible IRA and immediately convert to the Roth IRA.

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grabiner
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Post by grabiner » Tue Jun 22, 2010 8:34 pm

darrel wrote:Thanks for the quick responses.

Will medical insurance premiums (that are paid with pretax money) reduce the MAGI?
How about flex account pretax contributions?
Yes; these payments are not included in your income, so they reduce your MAGI as well as your taxable income. (However, don't over-fund the flexible spending account; reducing your taxable income isn't good if you lose the money in the process.)
I have a rollover IRA (is that a traditional one?).
That is a traditional IRA, and limits the benefit of the back-door contribution. If you have $20K in your rollover IRA and contribute $5K to a non-deductible IRA, and you then convert $5K, you don't get to convert the non-deductible $5K tax-free; rather, you convert $4K of deductible contributions and $1K of non-deductible contribuitions.
Wiki David Grabiner

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jeffp
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Post by jeffp » Wed Jun 23, 2010 8:13 am

The nondeductible IRA contribution converted to a Roth suggested by grabiner is probably the least painful way and requires no fudging of your MAGI.

If you want to go the route of a direct Roth contribution, though, keep in mind that $166,000 is an important number too. The amount you can contribute is limited by IRS guidelines (phased out) if you make less than $176,000 but more than $166,000.
"Doubt is not a pleasant condition, but certainty is absurd." - Voltaire

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