roth contribution income limits
I am trying to understand the rules, and the exceptions, in most tax returns to help me in future planning of money movement such as ROTH CONVERSIONS and RMD issues.
Overview:
In general, I understand that income is taxed, with exceptions. Your first part of your return gathers up most income sources and puts them together, with exceptions like tax exempt interest, money going into IRA’s pre-tax, etc., and puts them into total income.
Then there are additional exceptions that come out of that income to get you down to a lesser, more manageable number, called your AGI. So AGI is usually LESS than that from all income sources.
Additional portions of your taxes also use AGI, and MAGI. As best as I can see, MAGI is AGI with some of the exceptions being added back into it to get the larger MAGI numbers. MAGI is most always larger than just AGI.
OK – I understand all that, Both the additions, and the exceptions.
BUT – – I hit a wrinkle. ROTH CONVERSIONS are taxable events. They get reported. They are part of your AGI. AND they are part of your MAGI …..most all the time. I ran across a situation where it is not. PUB 590a talks about income tests (limits) to qualify to make a ROTH CONTRIBUTION. I am assuming they do not want high income individuals from taking advantage of the ROTH. Not really intended for them. BUT – – worksheet 2-1 remove any ROTH CONTRIBUTION, no matter how large, from the income tests (see lines 1-3 on worksheet 2-1, p. 42).
That’s great. It helps. But I do not understand why. In all other cases, the income from the IRA withdrawl to make the ROTH CONTRIBUTION is income, is taxed, and is used as income in all other cases that I can find. Why is it allowed to be removed for this test. What is the logic for this exception. FURTHER, since it is allowed, why do you not also get to remove IRA money that got distributed from an RMD. Both come from the traditional IRA, get taxed, and are in the AGI and MAGI in most all cases.
I want to understand the logic behind the math in the rule, and the rational that creates any breaks or exceptions. Helps to understand tax logic for doing other types of planning.
I will be doing ROTH CONVERSIONS for the next few years, and then I will also have RMD issues in my taxes. I need to understand any direct tax impacts, and any other subsequent issues. Example is that ROTH CONVERSION AMOUNTS are included as income for purposes of Medicare IRMAA calculations, but not in this worksheet for Roth Contributions. WHY. Where else is it excluded in MAGI, and where else is RMD excluded in MAGI??
-If anyone can help me understand the why behind this wrinkle, it will be very much appreciated.
Permalink Submitted by Alan - IRA critic on Wed, 2017-06-21 20:09
When Congress writes these law, they have to determine how much tax revenue they will create or forfeit. In the last several years they project the net effect for the next 10 years. Deductible TIRAs cost tax revenue and there is no certain recovery of the lost revenue until RMDs start. Roth IRAs are the reverse, and conversions particularly so because they generate tax revenue at the time rather than waiting for RMDs, therefore tax revenue is accelerated. In 2010 the conversion income limit was dropped to generate current tax revenue. Many of these tax provisions are passed with little concern for consistency or simplification which is the last priority for most of these provisions. There are several different definitions of MAGI based on how MAGI limits are applied. For example, once Medicare funding became critical IRMAA was introduced because that priority superceded the need to make conversions more attractive, so now a conversion for higher income people becomes more costly because IRMAA can be triggered. But there is no overall consistency or plan in place – Congress just reacts to the greatest need at the time, and they still only look out 10 years to analyze the net budget costs. That’s federal tax laws, but individual states then further modify the federal rules for determining state income taxes. There are states with no deductions for certain contributions, different thresholds for tax credits for retirement income, states that do not follow federal rules for HSA accounts, etc. Tax software has enabled much of this complexity, but it is more useful for filing taxes than for planning the future effect of a certain transaction. In short, some of the questions you ask may come down to a last minute provision inserted with little thought in a tax bill in order to secure a critical vote in Congress.