Modified Adjusted Gross Income (MAGI) and Traditional IRA (+401k)

[neo von retorch]

Can someone help check my numbers?

Gross Income: $80,000
Simple IRA contributions: $5150
401(k) contributions: $7600
Healthcare premiums: $1750
Mortgage Interest $3600
Real Estate Taxes: $2900
State Tax: $2400

Adjusted Gross Income: $56,600

Are work sponsored IRA contributions added back in to calculate the MAGI? Anything else above added back in? In theory, if my AGI is also my MAGI, then I can contribute the full $5500 to a Traditional IRA and also deduct that from my total tax bill.

[catccc]

I'm pretty sure your mortgage interest, state taxes, and real estate taxes do not affect MAGI.  They do reduce your AGI to arrive at taxable income.  But they are not part of the MAGI calculation.  So by my count, your MAGI/AGI is near 65K and you are in the phase out zone for traditional IRA deduction.

Why not increase your 401K contribution or simple IRA contributions?

[Cheddar Stacker]

Only the first 3 items are deducted before arriving at AGI (and therefore MAGI).

In the scenario you list here your AGI is $65,500 (80,000-5,150-7600-1,750) and your taxable income is $56,600 (65,500-8,900).

However I have a question: Why are you only contribution $7,600 to your 401k? This appears to be only 9.5%. If you double that to 19% or $15,200 your AGI drops to $57,900 which allows for a fully deductible TIRA contribution.

AGI and MAGI can be identical, or very different. MAGI has different rules for different things. I don't believe any work sponsored IRA contributions can be added back in calculating MAGI.

[neo von retorch]

I just started making 401k contributions July 1st (recent job change). I'll have to run the math to see if I can increase that through the end of the year, and if so, how much money I'll have left to put into an IRA.

Thanks for the response!

[Cheddar Stacker]

I just started making 401k contributions July 1st (recent job change). I'll have to run the math to see if I can increase that through the end of the year, and if so, how much money I'll have left to put into an IRA.

Thanks for the response!

Well 2 more potential issues I see then for 2014:

1) The total allowable 401k deferrals for the entire year for the employee is $17,500. If you had $5K in contributions from job A, you are only allowed $12,500 at job B.
2) Is that gross income of $80K from job B, or job's A and B combined? Both will count towards your AGI/taxable income.

[neo von retorch]

So job 1 was through the end of May. I contributed $5,150 to the SIMPLE IRA plan I had with them.

Job 2 is end of May through the end of the year. At current contribution levels (enough for an annual contribution of $17,500) I expect to contribute $7,600 total.

So at that point, I'm at $12,750 total. So there is room to contribute $4,750 additional to the 401(k). That drops my MAGI to $60,750 which means I would qualify for a partial Traditional IRA deduction.

[Cheddar Stacker]

Yep. I had to lookup the SIMPLE IRA rules for deferral and found this on IRS.Gov

How much may an employee defer under a SIMPLE IRA plan?

An employee may defer up to $12,000 in 2013 and 2014 (subject to cost-of-living adjustments for later years). Employees age 50 or over can make a catch-up contribution of up to $2,500 in 2013 and 2014 (subject to cost-of-living adjustments for later years). The salary reduction contributions under a SIMPLE IRA plan are "elective deferrals" that count toward the overall annual limit on elective deferrals an employee may make to this and other plans permitting elective deferrals.

I wasn't sure if your elective deferrals counted against your $17,500 max but it looks like they do.

Other thoughts for reducing AGI:
1) Harvest some capital losses if you have any.
2) Start a small business (Schedule C) and generate a loss. Only do this if you want one and that initial investment will eventually create some income.
3) Make an HSA contribution if applicable.

I also came across a lot on SIMPLE IRA rules that said not to convert to a regular IRA until a 2 year holding period has passed. Hopefully you are aware of all the extra rules on those plans - if not it's time to do some reading.

[neo von retorch]

Yes - I was already debating looking into also putting $750 or more into the HSA.

Vanguard actually prevents you from doing any kind of conversion with the Simple IRA - it specifically says "Hey bucko, you've contributed to this SIMPLE IRA sometime in the last two years, no can do." Or maybe that wasn't the exact wording.

Thanks for the research/suggestions. I could certainly sell some AMD stock for a loss right now...

[MooseOutFront]

If the HSA is contributed to through payroll deductions at work then this money is pre-FICA taxes as well as MAGI lowering.  I intentionally max mine as investment priority #2 behind "contribute enough to 401k to get employer match."