What is Modified Adjusted Gross Income (MAGI)?
In writing about Roth IRA contribution limits (and how to fix Roth IRA contribution mistakes) over the past week, I came to realize that some readers might not be familiar with the term modified adjusted gross income (MAGI). As it turns out, this is a critical value for determining things like whether or not you are eligible to: (1) contribute to a Roth IRA, (2) deduct traditional IRA contributions, or (3) convert funds from a traditional (or SEP) IRA to a Roth IRA. Thus, it’s important that people understand what it is and how it is calculated.
Here’s my understanding of the situation…
In order to figure out your MAGI you first need to know what your AGI represents. In short, your AGI is your total income (including wages, interest, income from retirement accounts, capital gains, and alimony received) less certain “adjustments.” These adjustments include things like deductible IRA contributions, 401(k) or 403(b) contributions, alimony payments, health insurance premiums (if you’re self-employed), moving expenses, and interest on student loans (consult the IRS web site or a tax professional for a full rundown). Note that AGI does not reflect standard or itemized deductions. Nor does is it influenced by personal exemptions.
In order to arrive at your modified AGI, you then need to add back certain things like income that you exluded due to the foreign earned income exclusion, any deductions for foreign housing, interest income for series EE bonds that you may have excluded because you used the proceeds to pay for qualified educational expenses, any deduction that you may have claimed for student loan interest or allowable tuition expenses, employer-paid adoption expenses, and any deduction that you may have claimed for a traditional IRA contribution (note that employer plans, such as 401(k) and 403(b) contributions still reduce your MAGI). Also, if you’re age 70-1/2 and receiving minimum distributions from a traditional, these funds do not count against your MAGI.
As a final note, it’s important to keep in mind that funds being converted from a traditional IRA to a Roth IRA do not count against your MAGI even though they may be taxable.
Published on November 10th, 2006 - 8 Comments
Filed under: Saving & Investing, Taxes
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To convert from a rollover to a Roth you have to be under MAGI of $100k right?
Comment by J — Nov 10th 2006 @ 9:19 amDon’t think you’re quite right on how it’s computed. Did a little hunting on the IRS website for the definition of MAGI for Roth IRA contribution eligibility.
http://www.irs.gov/publication.....l#d0e44219
According to it, Traditional IRA contributions are added back in, but it doesn’t mention 401K contributions. So increasing your 401K contributions could increase your eligibility.
Comment by MIke — Nov 10th 2006 @ 1:11 pmJ: Yes, less than $100k whether or not you’re married. Details in a forthcoming post.
Mike: Correct. That’s what I said. Those things get taken out for AGI, and traditional IRA goes back in for MAGI. So yes, an employer plan can be used to reduce MAGI, but a trad/SEP IRA cannot.
Re: MAGI for IRA purpose, if I have a rental loss on line 17 of 1040 and the loss is included in AGI line 37, do I take the loss out of AGI to derive the MAGI? The MAGI for passive activity loss limitation (Form 8582) excludes the rental loss. Is the MAGI calculation for IRA different from the MAGI calculation for passive acitivy loss limitation?
Comment by Rob — Mar 2nd 2007 @ 3:52 pmMy broker tells me that capital gains are deducted from AGI to get MAGI for $100,000 limit for IRA to Roth conversion. does not sound right to me. It it?
Comment by Pearl — Jul 18th 2007 @ 9:58 pmDo you know how Social Security Disability is handled when computing MAGI?
Comment by Chris — Jan 16th 2008 @ 11:31 amNew subscriber - where would I find your response to questions 5, 6 & 7 from Nov 10,2006 article about MAGI?
Great articles!
Comment by Mike Reed — Jan 25th 2008 @ 3:48 pmThanks,
Mike