2016 MFJ Roth Income Limits

Submitted by Richard Rea on Fri, 2016-12-02 19:42

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This is my annual post of this subject because it always seems to be a problem for my daughter and son-in-law.

And thanks to Alan in advance for the guidance.

In 2014 and 2015 my daughter did a “back door” contribution to her Roth IRA by first making her contribution to a Traditional IRA and then did a Roth Conversion because her MFJ income exceed the limits to make a contribution directly to a Roth IRA.

But in 2016 she rolled the dice and in March 2016 made a $5,500 contribution directly to her Roth IRA because she anticipated that she and her husband would be will below the income limit. ($184k -$190k)

It now looks like that assumptions is incorrect and they will be over $190k.

So she needs to know how to “unwind” this Roth IRA contribution to a Traditional IRA and then do a Roth Conversion?

First a few questions:

What is the “income” limit the IRS is talking about Line 22 Total Income or Line 37 Adjusted Gross Income or ????

She is telling me her MAGI for 2016 is $190,900E.

With the husband making a $18,000 401k contribution and her making a $12,500 Simple IRA contribution.

Help

SeattleSun



Submitted by Alan - IRA critic on Fri, 2016-12-02 23:41

  • The regular Roth contribution begins phaseout at 184k and is eliminated at 194k. This is modified AGI, which might be higher than the AGI on the tax return, but any conversions are not included in MAGI. If she ends up in the phaseout range and she does NOT have any pre tax non Roth IRA accounts, it is simpler to recharacterize the entire contribution to TIRA and then convert back to Roth. Since the TIRA contribution will be non deductible the conversion will be tax free up to the amount contributed to the Roth. Any gain in value will be taxable. 
  • However, if she has gains on her contribution, while more complex it will save some tax on the conversion if she keeps the allowed amount of the contribution, recharacterizes the rest and then converts the balance in the TIRA. For example, if MAGI was 189k (halfway through the phaseout ) she would be allowed a regular Roth contribution of roughly half the 5500. Half the earnings in the Roth would stay in the Roth and only half would be sent to the TIRA and have to be converted. So if earnings were 600 in the Roth (balance 6100), then 300 of the earnings would remain tax free and only the other 300 would be taxed when the recharacterized portion was converted back.
  • So its a trade off of a small savings vs. the simplicity of recharacterizing the entire contribution, and where MAGI ends up in the phaseout range is also a factor since the lower the MAGI (Closer to 184k), the larger the share of the original contribution is allowed. So the first step is determining the actual MAGI and the gain or loss on the contribution. Note that the gain or loss is figured using the gain or loss on the entire Roth account receiving the contribution, not just the investment of the 5500.

Submitted by Alan - IRA critic on Fri, 2016-12-02 23:41

  • The regular Roth contribution begins phaseout at 184k and is eliminated at 194k. This is modified AGI, which might be higher than the AGI on the tax return, but any conversions are not included in MAGI. If she ends up in the phaseout range and she does NOT have any pre tax non Roth IRA accounts, it is simpler to recharacterize the entire contribution to TIRA and then convert back to Roth. Since the TIRA contribution will be non deductible the conversion will be tax free up to the amount contributed to the Roth. Any gain in value will be taxable. 
  • However, if she has gains on her contribution, while more complex it will save some tax on the conversion if she keeps the allowed amount of the contribution, recharacterizes the rest and then converts the balance in the TIRA. For example, if MAGI was 189k (halfway through the phaseout ) she would be allowed a regular Roth contribution of roughly half the 5500. Half the earnings in the Roth would stay in the Roth and only half would be sent to the TIRA and have to be converted. So if earnings were 600 in the Roth (balance 6100), then 300 of the earnings would remain tax free and only the other 300 would be taxed when the recharacterized portion was converted back.
  • So its a trade off of a small savings vs. the simplicity of recharacterizing the entire contribution, and where MAGI ends up in the phaseout range is also a factor since the lower the MAGI (Closer to 184k), the larger the share of the original contribution is allowed. So the first step is determining the actual MAGI and the gain or loss on the contribution. Note that the gain or loss is figured using the gain or loss on the entire Roth account receiving the contribution, not just the investment of the 5500.

Submitted by Richard Rea on Sat, 2016-12-03 15:51

 Gross Income 190,900…….Husband 401k contribution $18,000………Wife’s Simple IRA contribution $12,500……….My new/current understanding is that this $30,500 results in a AGI/MAGI $160,400?……….And therefore a the “front door” Roth IRA contribuition is OK?   

Submitted by Alan - IRA critic on Sat, 2016-12-03 17:35

That’s right. Those contributions are NOT included in AGI or MAGI, so unless there are large deductions added back to AGI per this link    http://retirementdictionary.com/definitions/modifiedadjustedgrossincomemagi  the regular Roth contribution will be fully allowable. If there are any surprises when preparing their return in the spring, the recharacterization can be done then, they appear to be OK as is.

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