So you want to contribute to a retirement plan, and you’re trying to find out if you are eligible? Then you arrive at the eligibility for IRAs and Roth IRAs and find they’re based on your modified adjusted gross income. What is that exactly? Let’s take a look!
What is Modified Adjusted Gross Income?
Modified adjusted gross income (MAGI) is the income you get after you figure your gross income (all of your income) less any adjustments plus any modifications.
How to Calculate Modified AGI
In short, modified adjusted gross income simply adds back some of the deductions that were previously taken in the calculation of adjusted gross income.
To calculate your modified AGI, start with your AGI (which is usually the bottom line on your 1040 Form). Then add back in the following deductions:
Modified adjusted gross income is important because it defines the eligibility requirements for contributions to a tax-advantaged retirement account such as an IRA.
Roth IRAs. For instance, single taxpayers can contribute the full $5,500 Roth IRA limit allowed by law into a Roth IRA if their modified adjusted gross income is under $112,000. If that same taxpayer made more than $127,000 in 2013, they would be ineligible for a Roth IRA.
Traditional IRAs. In addition, the deduction for traditional IRAs is phased out as your modified AGI increases.
This is the reason modified adjusted gross income is so important: it greatly affects retirement planning. As such, it is essential that taxpayers understand this concept so that they can properly allocate their retirement money to different accounts and avoid paying unnecessary penalties and fees.
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