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 for a Roth IRA?
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. The availability of this tax credit is determined by MAGI.
How to Calculate MAGI for a Roth IRA
It's relatively simple to calculate MAGI for a Roth IRA.
- Determine your annual gross income - Gross income is your income before any deductions or taxes are deducted. This includes your wages and 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)
- 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 specific 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.
- 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 Supplemental Security Income (SSI) is not included.)
With those numbers, it's relatively easy to learn how to find MAGI for your Roth IRA. Using a MAGI calculator for a Roth IRA can be beneficial as there are also a number of very specific financial situations that can affect MAGI (e.g. certain kinds of business losses.) Check with your accountant to see if your situation qualifies. In many cases, your Adjusted Gross Income for a Roth IRA will be similar to the MAGI.
MAGI and Self Directed IRA
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 in an economically more advantaged position when making IRA contributions. This means that MAGI for a Roth IRA 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 of these situations and see how the numbers play out.
Self-Directed Roth IRA and MAGI
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 MAGI in an 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|
Adjusted Gross Income for a 401(k) Plan
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 MAGI 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|
If you're interested in adding a Self-Directed IRA to your retirement accounts, then schedule a call with a Madison Trust 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 to chat about your MAGI for a Roth IRA account or open an account online to get started with your self-directed account and alternative investments.
Disclaimer: All of the information contained on our website is a general discussion for informational purposes only. Madison Trust Company does not provide legal, tax, or investment advice. Nothing of the foregoing, or of any other written, electronic, or oral statement or communication by Madison Trust Company or its representatives, is intended to be, or may be relied as, legal, tax, investment advice, statements, opinions, or predictions. Prior to making any investment decisions, please consult with the appropriate legal, tax, and investment professionals for advice.