Author Topic: Eligibility for IRA Deduction (U.S. Tax Question)  (Read 2019 times)

BuildingFrugalHabits

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Eligibility for IRA Deduction (U.S. Tax Question)
« on: November 02, 2014, 07:54:42 AM »
In trying to figure out whether I should contribute to a Roth or Traditional IRA I'd like to clear up a question regarding the income limits.  I understand that if your adjusted gross income is below $98,000 in 2015 (for married filing jointly), your traditional IRA contribution is fully deductible.  Looking on IRS form 1040 line 37, it appears that your AGI is calculated by traditional IRA deduction.  This seems a bit like defining a word by using said word in the definition so I wanted to confirm. 

Looking around online.  http://taxes.about.com/od/deductionscredits/qt/traditional_ira.htm  this site is saying do not include the traditional IRA deduction i.e. a "modified" AGI.  Which interpretation is correct?  If it is the latter and ones income falls in the "phase out" range, how does that work exactly. For example phase out range is 98k to 118k.  Modified AGI is 108k.  Does that mean a married couple can contribute and deduct $5500 to a traditional and then is best served by contributing the remaining $5,500 to a Roth IRA?
« Last Edit: November 02, 2014, 07:59:53 AM by dave1 »

Gimesalot

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Re: Eligibility for IRA Deduction (U.S. Tax Question)
« Reply #1 on: November 02, 2014, 09:30:45 AM »
First, are you or your wife covered by a retirement plan at work?  If so, that changes things.

2015
Married filling jointly (no plans at work): $11000 fully deductible, no income limit
Married filling jointly (spouse has plan at work, you don't): $5500 for spouse not covered fully deductible, MAGI less than $183k
Married filling jointly (you have a plan at work): $5500 fully deductible, MAGI less than $98k

source: http://www.irs.gov/Retirement-Plans/IRA-Deduction-Limits

That is correct, you do not include the IRA contribution deduction in your calculation of MAGI for this purpose. 
Look at publication 590, worksheet 1-2 Figuring your reduced IRA Deduction for the exact formula. 
http://www.irs.gov/publications/p590/ch01.html#en_US_2013_publink1000230533

I think it is a little bit of a personal choice if traditional or Roth is better.  In your case, you could calculate the maximum contribution that you could deduct on your taxes, and put the rest into a Roth.
« Last Edit: November 02, 2014, 09:39:35 AM by Gimesalot »

SailAway

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Re: Eligibility for IRA Deduction (U.S. Tax Question)
« Reply #2 on: November 02, 2014, 06:16:43 PM »
That is correct, you do not include the IRA contribution deduction in your calculation of MAGI for this purpose. 
Look at publication 590, worksheet 1-2 Figuring your reduced IRA Deduction for the exact formula. 
http://www.irs.gov/publications/p590/ch01.html#en_US_2013_publink1000230533

This. MAGI is complicated but basically you can't deduct your trad IRA to make yourself eligible for the trad IRA deduction.

Allen

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Re: Eligibility for IRA Deduction (U.S. Tax Question)
« Reply #3 on: November 03, 2014, 12:46:31 PM »
Can my 401k contribution count towards the MAGI for purposes of fully deductible IRA contribution?

BuildingFrugalHabits

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Re: Eligibility for IRA Deduction (U.S. Tax Question)
« Reply #4 on: November 03, 2014, 03:00:03 PM »
Thanks for the helpful responses.  I figured someone on this board would have the answer.  401k deductions are included in the MAGI I believe.