Author Topic: Eligible for full deduction of traditional IRA contribution?  (Read 3454 times)

FLBiker

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Eligible for full deduction of traditional IRA contribution?
« on: December 19, 2014, 09:56:13 AM »
Hi folks,

My wife and I currently have Roth IRAs and 403bs.  I'm thinking that Traditional IRAs are really the way to go, because 1) we are now near the "peak" of our earning years and 2) the Roth pipeline.  I've looked into it with the IRS, and your ability to deduct the IRA contribution is based on your modified AGI.

Here are the rules (from IRS form 590):



And here is how they define the modified AGI:



My wife and I (married, filing jointly) earn a total of ~$105,000.  We both participate in employee sponsored retirement plans and also max out our 403b's (35K).  Am I right that this lowers our modified AGI to below the limit of $95,000?  In doing the modified AGI worksheet, the only thing we need to add is about $400 of student loan interest deductions (#2).  And the AGI (#1) we had in 2013 (when our income was similar) was $74K.  I just want to make sure that the modified AGI doesn't include our 403b contributions, because that would put us over the full deduction limit. 

I want to make sure I understand this properly before creating traditional IRAs and recharacterizing our 2014 Roth contributions.  If we're not eligible to deduct it, then I'm just going to stick with the Roth.

Thanks!  And if you need any additional info, just ask.

Cheddar Stacker

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Re: Eligible for full deduction of traditional IRA contribution?
« Reply #1 on: December 19, 2014, 10:50:40 AM »
Am I right that this lowers our modified AGI to below the limit of $95,000?

Yes.

If your gross is $105,000, and you max out 403b's, the starting point on the wages line of your tax return is $70,000. Your AGI is calculated based on what makes it on the tax return. Your 403b never makes it to the return.

Re-characterize away.

FLBiker

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Re: Eligible for full deduction of traditional IRA contribution?
« Reply #2 on: December 19, 2014, 11:02:00 AM »
Excellent, thanks so much!

Angie55

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Re: Eligible for full deduction of traditional IRA contribution?
« Reply #3 on: December 19, 2014, 01:15:47 PM »
I was about to ask a similar question. Sorry if its a repeat but I can't see the pictures...... So modified AGI:

Gross Income
- 401k contributions
- HSA contributions
- health/dental premiums
======Modified AGI?

Then other exemptions, standard deduction, and student loan interest deduction are applied to get to actual taxable amount?

Since I'm in the phaseout range I want to get this right so I recharacterize the exact optimum amount. Can't hurt to triple check.

Anyone have any idea how to do this if my Roth I'm recharacterizing has about 1,000 in gains? Do those stay in Roth or get applied somehow to the traditional?

FLBiker

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Re: Eligible for full deduction of traditional IRA contribution?
« Reply #4 on: December 19, 2014, 01:20:57 PM »
@ Angie55 -  Re: the gains -- basically, the way I understand this (and I just got off the phone with Vanguard) is that they basically treat the contribution as if I made it on the date of my original contribution, so the gains would be applied to the recharacterized contribution.

Cheddar Stacker

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Re: Eligible for full deduction of traditional IRA contribution?
« Reply #5 on: December 19, 2014, 01:44:06 PM »
I was about to ask a similar question. Sorry if its a repeat but I can't see the pictures...... So modified AGI:

Gross Income
- 401k contributions
- HSA contributions
- health/dental premiums
======Modified AGI?

Then other exemptions, standard deduction, and student loan interest deduction are applied to get to actual taxable amount?

Since the last question is easiest I'll answer that first. Yes. AGI less deductions/exemptions = taxable income. Or, M.AGI less SL interest less deductions/exemptions = taxable income.

Your calculation above looks correct. Just to be sure though, are you including all income in the Gross Income number? Wages, interest, dividends, capital gains (losses) etc. It looks to me like the only major difference between MAGI and AGI for the purposes of the T.IRA deduction is SL interest. The rest of it seems unlikely for most people.

Angie55

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Re: Eligible for full deduction of traditional IRA contribution?
« Reply #6 on: December 19, 2014, 01:55:07 PM »
Thank you so much! I feel more confident now.

Final question: (Brain isn't quite rational on Friday afternoon). On the gains.... I maxed mine out in March and contributed DH's in October. So there is probably about a $500-600 difference in gains between the two. In deciding which one to switch I'd probably want to switch the later right? Because the future gains on the $500 would be taxable in the traditional and tax free in the other?

Minor detail I know, but I'm an engineer....

Cheddar Stacker

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Re: Eligible for full deduction of traditional IRA contribution?
« Reply #7 on: December 19, 2014, 02:05:56 PM »
Thank you so much! I feel more confident now.

Final question: (Brain isn't quite rational on Friday afternoon). On the gains.... I maxed mine out in March and contributed DH's in October. So there is probably about a $500-600 difference in gains between the two. In deciding which one to switch I'd probably want to switch the later right? Because the future gains on the $500 would be taxable in the traditional and tax free in the other?

Minor detail I know, but I'm an engineer....

If they're in Roth now and you're moving to Traditional, move the one with the smallest amount of gains.

Angie55

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Re: Eligible for full deduction of traditional IRA contribution?
« Reply #8 on: January 29, 2015, 09:24:18 AM »
I think I may have just screwed myself doing this... I must have misunderstood.

I am smack in the middle of the phaseout range 107k MAGI. So I recharacterized 4900 of my husbands Roth IRA assuming that was the deductible amount. However, when I started filling out TurboTax last night, it was saying I could only deduct ~50% of that 4900. I was thinking I could deduct 50% of the maximum contribution not 50% of what I put in the traditional IRA.

Did I just screw myself by recharacterizing? What is the point of having only have deductible AND I still need to pay taxes when I withdraw. Dumb move? Can I reverse it? I thought I had it figured out but now I'm confused.

Cheddar Stacker

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Re: Eligible for full deduction of traditional IRA contribution?
« Reply #9 on: January 29, 2015, 09:34:55 AM »
I'd call a rep from where the IRA's are held and talk through it. If you didn't deduct the contribution you don't pay tax on the contribution at withdrawal, you would only pay tax on the earnings. If you can transfer the non-deductible portion over to a Roth you wouldn't pay taxes on the earning either.