Will Roth Conversion Increase MAGI
Will a 2008 Roth Conversion increase MAGI for the purposes of whether a 2008 Traditional IRA Contribution will be deductible?
Example: (assuming 85,000 threshold for deduction)
1) If my AGI before Roth Conversion is 75000 (with 10,000 worth of traditional IRA contributions making MAGI 85000)
2) And, I convert 40,000 of a traditional IRA to a Roth.
Can we deduct the full 10,000 traditional contribution? Or, does the Roth conversion make the traditional IRA contribution non-deductible?
Permalink Submitted by Clyde Wolf on Fri, 2008-11-14 16:11
Caklim,
Modified Adjusted Gross Income (MAGI) for Roth IRA Conversions does not include the conversion amount.
MAGI is identified in IRS Pub 590, Individual Retirement Arrangements, on page 60. http://www.irs.gov/pub/irs-pdf/p590.pdf
If you are making a conversion to a ROTH IRA, remember to complete Form 8606 Part II.
After 2009, the MAGI limit of $100,000 for converting from a TIRA to a Roth IRA will be eliminated.
In your example being covered by an employer plan, your TIRA contribution would not be deductable.
The MAGI for Traditional IRA purposes will include your ROTH IRA conversion amount. You can see Worksheet 1-1 for determining MAGI for Traditional IRA purposes on page 17 of IRS Pub 590 in the link above.
Permalink Submitted by Alan Spross on Fri, 2008-11-14 20:38
cwolf is mostly correct, but the calculations can be such that you should use tax software to determine your tax projections. Before applying worksheet 1-1, you will need worksheet 1-2 since you must figure your reduced IRA deduction before you figure MAGI. Even worse, if your traditional IRA has a basis in it, then you need worksheet 1-5 to first determine how much of a Roth conversion is taxable to see how much it will reduce your IRA deduction. Use tax software unless you really enjoy exercises in tax complexity.
But how to you best assess the current situation? This may depend on whether your main concern is your current tax bill or how quickly you can fund your Roth or TIRA accounts. You also need to factor in your marginal tax rate in the decision. For each dollar you convert that may reduce your IRA deduction, you are including $2 in taxable income. Therefore, if you are in the 25% bracket, there is an effective rate of 50% plus double your state marginal rate. So unless you have a small TIRA that is mostly basis and can be converted with a very small amount of taxable income, you might want to keep your conversions from exposing you to the deduction phaseout. If you are starting above the phaseout range, you do not get hit with double marginal rate bubble as your TIRA deduction stops.