MAGI question

[veegsy]

Hello o wise senior mustachians, I want to make sure I completely understand this:

If our household gross income is $120,000, and we contribute $37,000 to our 401Ks, our MAGI will be $83,000. We are then under the $101,000 income limit for making deductible IRA contributions, correct? So we can go on and contribute and deduct a further $11,000 combined in our IRAs. (This is a simplified example obviously). Is this correct?

If yes, I have a follow up:

If our household gross income is $145,000, and we contribute $37,000 to our 401Ks, we are now at $108,000 and we contribute $11,000 to our IRAs, our MAGI is now at $97,000. Win! We are under the $101,000 threshold. Is this also correct?

[Unique User]

According to the IRS, MAGI is your AGI with certain amounts added back in which include IRA deductions.  So you need to make sure you are under the $101k limit without including the IRA deductions.  Example #1 is correct, example #2 would only net you a partial deduction since the $108k is above $101k, but still below the cut off of $121k. 

[COEE]

Generally speaking - you are correct on both accounts - assuming you're talking a traditional IRA and you don't have anything to add back in to your AGI to create your MAGI.

Most brokerages will allow you to contribute to a traditional IRA and then recharacterize investments into to a roth IRA after you've done your taxes and figured out which percentage need to be in roth.  This is helpful if you're MAGI will be more than $101k.

You can no longer recharacterize a roth to traditional (for 2018 contributions) so it's best to hold in traditional until you do your taxes.  Or wait until you do your taxes to make your contribution.

[catccc]

According to the IRS, MAGI is your AGI with certain amounts added back in which include IRA deductions.  So you need to make sure you are under the $101k limit without including the IRA deductions.  Example #1 is correct, example #2 would only net you a partial deduction since the $108k is above $101k, but still below the cut off of $121k.

Exactly this.  My household is creeping toward the line of partial deduction territory.  So watch your other income closely.  For example, we are timing bank bonuses to hit in early 2019 instead of 2018, we are closely watching our interest and dividend income in case we need to recharacterize a portion of our tIRA contributions to a Roth.  Luckily I think tax planning is fun.

[MDM]

Correct on example #1, not correct on example #2.  The MAGI calculation for traditional IRA purposes is https://www.irs.gov/publications/p590a#en_US_2017_publink1000230489.

Note that there is more than one "MAGI" but that link is for the one of interest here.

One may still recharacterize any current year contributions made to either Roth or traditional into the other type.  What one may no longer do is recharacterize any conversions.

[veegsy]

Thanks everyone, this was very helpful!