Author Topic: Deduct 401k and Traditional IRA?  (Read 2551 times)

ibleedirish

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Deduct 401k and Traditional IRA?
« on: May 23, 2017, 02:55:35 PM »
Hello!

My wife and I are currently in career transitions and will be making significantly less than we have previously. As such, we may now be eligible to qualify for healthcare subsidies etc. so we are trying to show as little income as possible for the next two years.

Numbers:
We have 2 kids and are responsible for purchasing our own healthcare.
I will make 99k
She will make btw 35-45k
We plan to max out both our 401ks and Traditional IRAs. So that will be 47k.

My question is, does the IRS allow the deduction of both (all 4, really) retirement accounts?
In addition, any ideas for further bringing our taxable income down?

TIA!

seattlecyclone

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Re: Deduct 401k and Traditional IRA?
« Reply #1 on: May 23, 2017, 03:04:46 PM »
You can each deduct your 401(k) contributions regardless of income. The IRAs will depend on your income. For a married couple filing jointly who have retirement plans at work, you'll need a MAGI less than $99k to deduct the full IRA contribution.

The MAGI for IRA purposes does not include traditional 401(k) contributions but it does include earnings that you might put into your traditional IRA. $99k + $35k - ($18k * 2) = $98k, so you'll be under the limit if your wife earns on the lower end of your predicted range. If she goes higher, you will likely run into the phase-out range. Note that other pre-tax payroll deductions (such as health insurance if your employer offered it) will also decrease your MAGI.

MDM

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Re: Deduct 401k and Traditional IRA?
« Reply #2 on: May 23, 2017, 07:10:51 PM »
In addition, any ideas for further bringing our taxable income down?
Are you eligible for HSAs?

ibleedirish

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Re: Deduct 401k and Traditional IRA?
« Reply #3 on: May 23, 2017, 09:02:42 PM »
In addition, any ideas for further bringing our taxable income down?
Are you eligible for HSAs?

Great question. My understanding is that it depends on my selection of the insurance plan I select on the marketplace, correct? I did not select an HSA eligible plan this year because I selected a plan based on my assumption we'd have some higher than average costs this year for one of our little girls. Unfortunately that came true. Hopefully things are looking up and we hope to pick an HSA eligible plan this fall when its time to renew (politics withstanding).

Curious. You mention HSAs, as in plural? Keep in mind neither of our employers offers healthcare at this time. I'd love to know about the plural aspect, or any other options you may recommend in our situation.

ibleedirish

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Re: Deduct 401k and Traditional IRA?
« Reply #4 on: May 23, 2017, 09:12:15 PM »
You can each deduct your 401(k) contributions regardless of income. The IRAs will depend on your income. For a married couple filing jointly who have retirement plans at work, you'll need a MAGI less than $99k to deduct the full IRA contribution.

The MAGI for IRA purposes does not include traditional 401(k) contributions but it does include earnings that you might put into your traditional IRA. $99k + $35k - ($18k * 2) = $98k, so you'll be under the limit if your wife earns on the lower end of your predicted range. If she goes higher, you will likely run into the phase-out range. Note that other pre-tax payroll deductions (such as health insurance if your employer offered it) will also decrease your MAGI.

Beautiful, thank you.
I'm new at this tax game. Do charitable contributions, out of pocket medical expenses (insurance premiums not paid by work) or anything else that I think of as a tax deduction lower my MAGI?

ibleedirish

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Re: Deduct 401k and Traditional IRA?
« Reply #5 on: May 23, 2017, 09:16:42 PM »
Hello!

My wife and I are currently in career transitions and will be making significantly less than we have previously. As such, we may now be eligible to qualify for healthcare subsidies etc. so we are trying to show as little income as possible for the next two years.

Numbers:
We have 2 kids and are responsible for purchasing our own healthcare.
I will make 99k
She will make btw 35-45k
We plan to max out both our 401ks and Traditional IRAs. So that will be 47k.

My question is, does the IRS allow the deduction of both (all 4, really) retirement accounts?
In addition, any ideas for further bringing our taxable income down?

TIA!



What about kids college plans? 529 etc. We are in MI. Do any of those lower our MAGI?

MDM

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Re: Deduct 401k and Traditional IRA?
« Reply #6 on: May 23, 2017, 09:21:26 PM »
Curious. You mention HSAs, as in plural? Keep in mind neither of our employers offers healthcare at this time. I'd love to know about the plural aspect, or any other options you may recommend in our situation.
It's only significant if you are age 55+, in which case each person of that age gets an additional $1000 allowance that must go into that person's HSA if used.

Otherwise the family HSA limit can be used in any ratio from 0%/100% to 100%/0% between spouses.

But HSA access depends on having a High Deductible Health Plan (HDHP), and the advisability of getting an HDHP depends on your expected expenses and the specific terms (e.g., co-pays, out-of-pocket max, etc.) of the HDHP.  Not to mention having any HDHP available to you....

seattlecyclone

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Re: Deduct 401k and Traditional IRA?
« Reply #7 on: May 23, 2017, 09:22:08 PM »
Take a look at Form 1040. Everything on the front page of that form determines your AGI. That number, slightly modified, forms your MAGI.

Unfortunately the things you mentioned (charitable contributions, medical expenses, 529 plans) are deducted on the second page of Form 1040 if at all.

But if you sign up for a High Deductible Health Plan you will become eligible to contribute to an HSA, and those contributions do reduce your MAGI. That's probably the next thing to look into after you max out your 401(k)s.

MDM

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Re: Deduct 401k and Traditional IRA?
« Reply #8 on: May 23, 2017, 09:23:45 PM »
What about kids college plans? 529 etc. We are in MI. Do any of those lower our MAGI?
No.  But many states do allow a deduction for net contributions to that state's 529 plan.  Appears MI is one, so you could save 4.25% of your MI 529 contribution on your MI state tax.