September 7, 2021

The IRS Cares About Your MAGI

There are many numbers that are used to measure consumers. Everybody knows about credit scores, tax brackets, and net worth. There is one number, though, that is quite important, yet most people have never heard of it. This number is personal to you and the government utilizes it to determine your eligibility for a number of programs. Get ready to meet MAGI – Modified Adjusted Gross Income. 

What is MAGI used for? 

MAGI is a financial status metric that the government uses to determine your eligibility for a number of financial opportunities. These include: 

  • Roth IRA – The IRS has strict guidelines regarding who can contribute to a Roth IRA. When a person’s income is too high, they lose their Roth capability. The income level for this determination is measured by MAGI.  
  • 401(k) and IRA eligibility – Many investors would like to max out their retirement savings by investing in both a company sponsored 401(k) and an IRA. However, the ability to contribute to an IRA is impacted by income level and 401(k) participation. Here, too, income is measured by MAGI. 
  • Healthcare premiums - The Health Insurance Marketplace can make insurance more affordable for some people by offering them a significant tax credit. Availability of this tax credit is determined by MAGI. 

How do you calculate MAGI? 

MAGI is relatively simple to calculate.  

  1. Determine your annual gross income - Gross income is your income before any deductions or taxes are deducted. This includes your wages, as well as any other income (e.g. retirement distributions) that you may earn. This number can be found on line 9 of your Form 1040. Included in this are: 
  • Regular wages 
  • Unemployment compensation (except for pandemic compensation) 
  • Social Security 
  • Pension income 
  • Investment income 
  • IRA and 401(k) withdrawals  
  • Alimony (for divorces finalized before January 1, 2019) 
  1. Determine your AGI (Adjusted Gross Income) - AGI is your gross income with any relevant deductions subtracted from it. These include items like student loan interest, retirement plan contributions, and certain business expenses. (You can get a more detailed listing of the deductions and how to apply them with this PDF from the IRS.) AGI can be found on Line 11 on the 2020 Form 1040. 
  1. Determine your MAGI – To get your MAGI number, you have to add back in three main components: 
  • Any foreign income that was not subject to taxes 
  • Any interest that was not subject to taxes 
  • Non-taxable Social Security benefits (Regular SSI is not included.) 

There are also a number of very specific financial situations which can affect MAGI (e.g. Certain kinds of business losses.) Check with your accountant to see if your situation qualifies. In many cases, AGI and MAGI will be very similar. 

MAGI and Self Directed IRAs 

MAGI is an important number for those looking to open a Self Directed IRA. This is because many investors don’t open a Self Directed IRA as their initial retirement account. Rather, they start off with a company sponsored 401(k) or a standard IRA, and then, later in their investing career, transition to a Self Directed IRA. As a result, they will often be at an economically more advantaged position when making IRA contributions. This means that MAGI will play more of a role in determining their ability to make those contributions. 

There are two specific situations where MAGI is going to play an important part: 

  • Opening a Self Directed Roth IRA 
  • Opening a Traditional Self Directed IRA while also being invested in a 401(k) plan 

Let’s look at both at these and see how the numbers play out. 

MAGI and a Self Directed Roth IRA 

The IRS has imposed specific MAGI limits which affect contributions to a Self Directed Roth IRA. Depending on income and filing status you may either be able to make the full Roth contribution, a phased out partial contribution, or no contribution at all. The current (2023) full contribution amount for a Self Directed Roth IRA is $6,500 for those under 50 and $7,500 for those 50 and older. The partial phased out contribution can be calculated using these instructions from the IRS

Filing Status MAGI (2023)Contribution Allowed 
Married – filing jointly Less than $218,000 Full contribution 
Married – filing jointly $218,000 - $228,000 Partial contribution 
Married – filing jointly More than $228,000 No contribution 
Single Less than $138,000 Full contribution 
Single $138,000 - $153,000 Partial contribution 
Single More than $153,000 No contribution 

Combining a 401(k) Plan and a Self Directed IRA 

Similar to the Roth IRA, the IRS has set economic guidelines which limit IRA contributions for those who are also participating in a 401(k) plan. In addition to the limits noted below, there are other situations where the limits may change (e.g. married but only your spouse has a 401(k).) Please see the IRS guidelines for more details. 

Filing Status MAGI Contribution Allowed 
Married – filing jointly Less than $116,000 Full contribution 
Married – filing jointly $116,000 - $136,000 Partial contribution 
Married – filing jointly More than $136,000 No contribution 
Single Less than $73,000 Full contribution 
Single $73,000 - $83,000 Partial contribution 
Single More than $83,000 No contribution 

Moving Forward 

If you’re interested in adding a Self Directed IRA to your retirement accounts, then schedule a call with a Madison specialist. They will be able to help you determine your financial standing, as well as give an informed opinion as to the permissibility of your intended asset. You can schedule a call here

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