Roth income limits
Does tax exempt interest get added back in to figure MAGI for Roth IRA contribution income limits? Clients AGI was $116,434 in 2017 and filed single. She made a $6,500 Roth contribution in 2017 and just received a letter from IRS that she exceeded maximum allowable Roth contribution for 2017!! She had W2 wages of $12,000 and tax exempt interest of $7,500. Does the tax exempt interest get added back for MAGI calculation to determine Roth IRA MAGI income??
Permalink Submitted by Alan - IRA critic on Wed, 2018-11-14 15:24
Only excludible savings bond interest from Form 8815 gets added to AGI, no other tax exempt interest. However, there are other additions such as student loan interest or foreign earned income earned income or housing exclusions. See p 42 of Pub 590 A. The MAGI phaseout begins at 118k, so without add backs I don’t know what the IRS is looking at. Are you sure the IRS is not referring to a 2016 contribution, as they would not usually get to 2017 contributions this soon. Recharacterization deadline was just 10/15.
Permalink Submitted by MIKE KRUCHTEN on Thu, 2018-11-15 12:19
Notice specifically states 2017 IRA contribution!!! No other add backs but not to say client didnt forget to report something making filed AGI figure wrong.A follow up question on MAGI, does a Roth conversion get removed from MAGI for income contribution limits. I recall reading an article that thou taxable, the conversion amount is removed from MAGI as to not limit the ability to make a contribution in same year of a large conversion. Is this true?
Permalink Submitted by Alan - IRA critic on Thu, 2018-11-15 16:06
Yes, a Roth conversion is subtracted in coming up with MAGI for regular contribution purposes. Perhaps a conversion was made in this case, and the IRS failed to subtract it? Another possibility would be if client also made a TIRA contribution since the Roth is considered to be the excess in such a case. Did client report the W-2 income on the correct line? Otherwise, the IRS could well be wrong and client should appeal after double checking their MAGI.
Permalink Submitted by MIKE KRUCHTEN on Thu, 2018-11-15 23:44
Thanks for the rapid reply. It seems each MAGI calculation is slightly different depending on the program; ie: Roth IRA contributions, Affordable Care Act subsidies, Medicaire premiums. Hard to keep all differing versions of MAGI. Just to reaffirm, Tax Exempt interest on line 8b and Roth conversions are not included in MAGI for Roth contribution purposes??
Permalink Submitted by Alan - IRA critic on Thu, 2018-11-15 23:59
That is correct. They are not included, but in different ways. TE interest is not included in Form 1040 AGI in the first place, but conversions are included in Form 1040 AGI, but subtracted back out for Roth contribution purposes in the worksheet in Pub 590 A. Yes, there are many different variations of MAGI, would be interesting to know just how many.