Author Topic: Tax Strategy Based on My AGI  (Read 967 times)

LaurenR

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Tax Strategy Based on My AGI
« on: September 14, 2017, 01:00:25 PM »
I'm married filing jointly, and for 2017 I estimate my AGI to be $169k after contributing the max ($18k) to my 401k.  My employer will contribute $7k.

I've got extra money and I want to know where to put it!  Note I do not have an HSA and can't get one.  Could/should I:

1) Put $11k into Roths for both my husband and I ($5,500 each, he is unemployed) since I'm phased out of contributing to a trad IRA?
2) Put $19k after-tax contribution into my work 401k to hit the $44k limit?  Would plan to roll over the contributions to Roth and the earnings to trad IRA once I "retire"
3) Just invest in an after-tax account

Can I do both 1 & 2 or does the $11k count towards the $44k limit???  That's one area I'm really confused on.

MDM

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Re: Tax Strategy Based on My AGI
« Reply #1 on: September 14, 2017, 01:17:14 PM »
I'm married filing jointly, and for 2017 I estimate my AGI to be $169k after contributing the max ($18k) to my 401k.  My employer will contribute $7k.

I've got extra money and I want to know where to put it!  Note I do not have an HSA and can't get one.  Could/should I:

1) Put $11k into Roths for both my husband and I ($5,500 each, he is unemployed) since I'm phased out of contributing to a trad IRA?
2) Put $19k after-tax contribution into my work 401k to hit the $44k limit?  Would plan to roll over the contributions to Roth and the earnings to trad IRA once I "retire"
3) Just invest in an after-tax account

Can I do both 1 & 2 or does the $11k count towards the $44k limit???  That's one area I'm really confused on.
See Investment Order for general comments.

If DH has been unemployed for the whole year, he can put $5500 into a traditional IRA.  Given your income, unless you have a great pension already vested, traditional is probably better than Roth.  See IRA Deduction Limits | Internal Revenue Service.

2Birds1Stone

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Re: Tax Strategy Based on My AGI
« Reply #2 on: September 14, 2017, 01:41:29 PM »
I'm married filing jointly, and for 2017 I estimate my AGI to be $169k after contributing the max ($18k) to my 401k.  My employer will contribute $7k.

I've got extra money and I want to know where to put it!  Note I do not have an HSA and can't get one.  Could/should I:

1) Put $11k into Roths for both my husband and I ($5,500 each, he is unemployed) since I'm phased out of contributing to a trad IRA?
2) Put $19k after-tax contribution into my work 401k to hit the $44k limit?  Would plan to roll over the contributions to Roth and the earnings to trad IRA once I "retire"
3) Just invest in an after-tax account

Can I do both 1 & 2 or does the $11k count towards the $44k limit???  That's one area I'm really confused on.
See Investment Order for general comments.

If DH has been unemployed for the whole year, he can put $5500 into a traditional IRA.  Given your income, unless you have a great pension already vested, traditional is probably better than Roth.  See IRA Deduction Limits | Internal Revenue Service.

Wouldn't their AGI be too high to get a deduction for the traditional? The Roth would diversify your future tax risk and provide tax free growth moving forward.
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dandarc

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Re: Tax Strategy Based on My AGI
« Reply #3 on: September 14, 2017, 01:48:33 PM »
I'm married filing jointly, and for 2017 I estimate my AGI to be $169k after contributing the max ($18k) to my 401k.  My employer will contribute $7k.

I've got extra money and I want to know where to put it!  Note I do not have an HSA and can't get one.  Could/should I:

1) Put $11k into Roths for both my husband and I ($5,500 each, he is unemployed) since I'm phased out of contributing to a trad IRA?
2) Put $19k after-tax contribution into my work 401k to hit the $44k limit?  Would plan to roll over the contributions to Roth and the earnings to trad IRA once I "retire"
3) Just invest in an after-tax account

Can I do both 1 & 2 or does the $11k count towards the $44k limit???  That's one area I'm really confused on.
See Investment Order for general comments.

If DH has been unemployed for the whole year, he can put $5500 into a traditional IRA.  Given your income, unless you have a great pension already vested, traditional is probably better than Roth.  See IRA Deduction Limits | Internal Revenue Service.

Wouldn't their AGI be too high to get a deduction for the traditional? The Roth would diversify your future tax risk and provide tax free growth moving forward.
AGI appears to be too high for OP to deduct an IRA, but not for the unemployed husband, assuming said husband has been unemployed / otherwise not covered by an employer-sponsored plan for the whole year.

In this situation, both OP and husband have the same MAGI (presumably $169K - no mention of the things you'd add back to get there from AGI, so lets go with that).  Same MAGI for both, but different MAGI limits for tIRA deduction.  So for OP, the limit for a full deduction is $99K (2017) - obviously OP does not qualify.  For unemployed husband, the limit is $186K.  So you could go traditional for husband and Roth for OP with that first $11K.

https://www.irs.gov/retirement-plans/ira-deduction-limits

Edit: Copied the single limit for OP instead of MFJ limit.  For Husband, number was correct.
« Last Edit: September 14, 2017, 04:10:56 PM by dandarc »

seattlecyclone

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Re: Tax Strategy Based on My AGI
« Reply #4 on: September 14, 2017, 02:47:39 PM »
I'm married filing jointly, and for 2017 I estimate my AGI to be $169k after contributing the max ($18k) to my 401k.  My employer will contribute $7k.

I've got extra money and I want to know where to put it!  Note I do not have an HSA and can't get one.  Could/should I:

1) Put $11k into Roths for both my husband and I ($5,500 each, he is unemployed) since I'm phased out of contributing to a trad IRA?
2) Put $19k after-tax contribution into my work 401k to hit the $44k limit?  Would plan to roll over the contributions to Roth and the earnings to trad IRA once I "retire"
3) Just invest in an after-tax account

Can I do both 1 & 2 or does the $11k count towards the $44k limit???  That's one area I'm really confused on.

The overall 401(k) limit is $53k, not $44k. The limit includes your contributions and any employer matching, but does not include any IRA contributions.
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LaurenR

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Re: Tax Strategy Based on My AGI
« Reply #5 on: September 14, 2017, 03:09:27 PM »
Oops I was wrong about the limit - it's $54k, not $44k.  And I think our MAGI would be $187k ($169k+$18k that went into 401k already)?  I'm new to all these numbers.

I'm assuming that we'd file jointly, and I found the following for filing jointly: "For married couples filing jointly, where one spouse's IRA contribution is covered by a workplace retirement plan, the income phase-out range for 2017 is $99,000 - $119,000."  I think this rules out the trad IRA for both of us.  :(

Also to clarify, husband was employed for part of the year but did not participate in a 401k.  He could have, but didn't.  Anything else that's unclear?

MDM

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Re: Tax Strategy Based on My AGI
« Reply #6 on: September 14, 2017, 03:31:28 PM »
Oops I was wrong about the limit - it's $54k, not $44k.  And I think our MAGI would be $187k ($169k+$18k that went into 401k already)?  I'm new to all these numbers.
You don't need to add back the 401k.  See your modified AGI for traditional IRA purposes.

Quote
I'm assuming that we'd file jointly, and I found the following for filing jointly: "For married couples filing jointly, where one spouse's IRA contribution is covered by a workplace retirement plan, the income phase-out range for 2017 is $99,000 - $119,000."  I think this rules out the trad IRA for both of us.  :(
Nope.  That's the range for the spouse who is covered.  The non-covered spouse will be OK.  See links given in previous posts.

Quote
Also to clarify, husband was employed for part of the year but did not participate in a 401k.  He could have, but didn't.  Anything else that's unclear?
Check the link about being covered by a retirement plan (it's within the links given previously) to ensure he is "not covered" this year.  So far so good (based on your quote here) but there are other considerations.

LaurenR

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Re: Tax Strategy Based on My AGI
« Reply #7 on: September 14, 2017, 03:46:06 PM »
Wow that's awesome!

So just to check, I will:

1) Have $18k contributions to my 401k
2) Have $7k employer contributions to my 401k
3) Have $5.5k contributions to spouse trad IRA
4) Have $5.5k contributions to my Roth IRA

So how much more room do I have for the mega backdoor Roth??  $29k (=54-18-7)?  Or do the IRA contributions go against that $54k limit??


MDM

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Re: Tax Strategy Based on My AGI
« Reply #8 on: September 14, 2017, 03:51:59 PM »
So how much more room do I have for the mega backdoor Roth??  $29k (=54-18-7)?
Yes.
Quote
Or do the IRA contributions go against that $54k limit??
No.

seattlecyclone

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Re: Tax Strategy Based on My AGI
« Reply #9 on: September 14, 2017, 03:58:31 PM »
AGI is well-defined and unambiguous: it's the number at the bottom of the front page of your Form 1040.

MAGI, on the other hand, means different things in different contexts. It is literally your AGI modified by adding or subtracting different things from it. There are a few different places in the tax code where you might have to calculate a MAGI. IRA eligibility and Obamacare subsidies are two that people commonly look at, and they each use a different formula!

For the purpose of the IRA MAGI, pre-tax 401(k) contributions don't count.
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The Roth IRA was named after William Roth, who represented Delaware in the US senate from 1971-2001. "Roth" is a name, not an acronym. There's no need to capitalize the final three letters.

LaurenR

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Re: Tax Strategy Based on My AGI
« Reply #10 on: September 14, 2017, 04:03:42 PM »
Awesome, thanks so much everyone!  Much clearer.

In general, do you think the mega backdoor roth to be worth it?  I've got quite a bit of extra money to play with this year but want to do the right thing with it.

Thanks again!

seattlecyclone

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Re: Tax Strategy Based on My AGI
« Reply #11 on: September 14, 2017, 04:44:44 PM »
In general, do you think the mega backdoor roth to be worth it?

Yes, absolutely. Compared to a taxable account, getting that money into a Roth account eliminates annual dividend taxes and capital gains tax when you sell. It comes with some small strings attached, mainly a pretty hefty tax if you withdraw more than your contributions before you're at a "normal" retirement age. If you don't expect to need to dip into the earnings early, it's a great deal.
I made a blog! https://seattlecyclone.com/

The Roth IRA was named after William Roth, who represented Delaware in the US senate from 1971-2001. "Roth" is a name, not an acronym. There's no need to capitalize the final three letters.

DavidAnnArbor

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Re: Tax Strategy Based on My AGI
« Reply #12 on: September 14, 2017, 08:17:29 PM »
Another reason to do a megabackdoor Roth is I think anything that gets money out of taxable accounts and into IRA's and/or 401k may also afford you some legal protections in that I don't think that money can be touched in a bankruptcy or legal action against you.

LaurenR

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Re: Tax Strategy Based on My AGI
« Reply #13 on: September 27, 2017, 12:39:39 PM »
Nice I didn't know that!  Thanks everyone!