Splitting High Modified AGI Person’s $6,000 or $7,000 Dollar Limitation Between Roth IRA and Traditional IRA Contribution
Joe is 66 years old, married and filing jointly. His W-2 compensation for 2020 will be $150,000. He has no side business. His wife doesn’t work. Their Adjusted Gross Income for 2020 will be $197,000, which consists of Joe’s salary and $45,000 in dividends and interest. Joe wants to contribute $7,000 to IRAs for the year, with the maximum to a Roth IRA. His contribution to the traditional IRA will be entirely deductible because neither Joe nor his wife is a participant in an employer plan. Joe is not receiving Social Security. Joe didn’t do any Roth IRA conversions during 2020. Joe is not a participant in a pension or profit sharing plan. For simplicity, he does not have any of the things in items 2 thru 7 of Worksheet 1.1 for traditional IRA contribution deduction Modified AGI, which are items 5 thru 10 of Worksheet 2.1 for Roth IRA contribution eligibility Modified AGI.
Worksheet 2-1 of Publication 590-A Page 40 to calculate Modified AGI for Roth IRA Contribution:
Line 1 AGI $195,000
Line 2 0
Line 3 195,000
Line 4 T*
Lines 5 thru 10 All 0
Line 11 – Add 3 thru 10 195,000 + T
Line 12 206,000 ($203,000 for 2019 is in the publication.)
*Line 4 is the deduction for the contribution to the traditional IRA, which is $7,000 minus the amount of the Roth IRA contribution. Both of these contribution amounts are unknown. Call the deduction for the contribution to the traditional IRA T. Line 4 is T and Line 11 becomes 197,000 + T. Line 11 can’t be more than Line 12 because T is at most $7,000 and it would have to be $11,000 for Line 11 to be more than Line 12. Line 11, which is 195,000 + T, is the Modified AGI.
Worksheet 1-1 of Publication 590-A Page 15 to calculate Modified AGI for Traditional IRA Deduction: Contribution:
Line 1 $197,000
Lines 2 thru 7 All 0
Line 8 197,000 MAGI for traditional IRA Deduction
Worksheet 2-2 of Publication 590-A Page 43 to calculate Modified AGI for Roth IRA Contribution:
Line 1 Modified AGI for Roth IRA purposes 195,000 + T
Line 2 Married filing jointly 2020 196,000
Line 3 Line 1 minus Line2 T -1,000
Line 4 10,000
Line 5 Line 3 divided by Line 4 T/10,000 – .1
Line 6 lesser of $7,000 or
Taxable compensation 7,000
Line 7 Multiply Line 5 by Line 6 .7T – 700
Line 8 Line 6 – Line 7 6,300 – .7T
Line 9 Contributions to other IRAs T
Line 10 Line 6 – Line 9 7,000 – T
Line 11 Lesser of Line 8 or Line 10 Reduced Roth IRA Contribution Limit
It is impossible to know whether Line 8, 6,300 – .7T, is more than or less than Line 10, 7,000 – T, without knowing what T is. Line 8 = Line 10 if T = 2,333.33.
• Is the amount of the traditional IRA contribution $2,333, which is fully deductible because Joe is not an active participant in an employer plan?
If the traditional IRA contribution is $2,333.33, then the Roth IRA contribution is $7,000 – $2,333.33 = $4,666.67. Check this result:
Line 11 Roth IRA Modified AGI = 195,000 + 2,333 =197,333
Line 12 206,000
Line 11 is not more than Line 12
Modified AGI for Roth IRA purposes is 197,333.
Redo Worksheet 2-2:
Line 1 Modified AGI for Roth IRA purposes 197,333
Line 2 Married filing jointly 2020 196,000
Line 3 Line 1 minus Line 2 1,333
Line 4 10,000
Line 5 Line 3 divided by Line 4 .1333
Line 6 lesser of $7,000 or
Taxable compensation 7,000
Line 7 Multiply Line 5 by Line 6 933
Line 8 Line 6 – Line 7 6,067, rounded up to the nearest 10 is 6,070
Line 9 Contributions to other IRAs 2,333
Line 10 Line 6 – Line 9 4,667
Line 11 Lesser of Line 8 or Line 10 4,667 is less than 6,067
• Is the amount of the Roth IRA contribution $4,667?
As a check, $2,333 + $4,667 = $7,000
More questions:
If Joe is a participant in an employer plan, then his traditional IRA contribution is fully nondeductible because the phase-out range for deductibility is $104,000 to $124,000, line 4 on Worksheet 2.1 is 0 and Joe’s Roth IRA Modified AGI is his AGI of $195,000. Worksheet 2-2 becomes:
Line 1 Modified AGI for Roth IRA purposes 195,000
Line 2 Married filing jointly 2020 196,000
Line 3 Line 1 minus Line2 1,000
Line 4 10,000
Line 5 Line 3 divided by Line 4 .100
Line 6 lesser of $7,000 or
Taxable compensation 7,000
Line 7 Multiply Line 5 by Line 6 700
Line 8 Line 6 – Line 7 6,300
Line 9 Contributions to other IRAs 700**
Line 10 Line 6 – Line 9 6,300
Line 11 Lesser of Line 8 or Line 10 They are equal.
**This amount makes Lines 8 and 10 equal. If the traditional IRA contribution is less than $700, say $500, then Line 10 is $7,000 – $500 = $6,500 and Line 11 is the lesser of $6,500 and $6,300 or $6,300 and the total IRA contribution is $6,300 + $500 + $6,800, which is less than $7,000. If the traditional IRA contribution is more than $700, say $1,000, then Line 10 is $7,000 – $1,000 = $6,000 and Line 11 is the lesser of $6,000 and $6,300 or $6,000 and the total IRA contribution is $6,000 + $500 + $6,000, which is also less than $7,000.
The calculation where the individual can make a deductible contribution to a traditional IRA requires use of algebra to find the amounts of the Roth IRA contribution and the traditional IRA contribution. The calculation where the individual cannot make a deductible contribution to a traditional IRA does not require use of algebra to find the amounts of the Roth IRA contribution and the traditional IRA contribution, but it requires a “guess” of $700 as the traditional IRA contribution and proof that this amount maximizes the total IRA contribution.
• Am I missing something?
• Am I making something easy into something hard?
• Does the IRS require a taxpayer, his accountant or his IRA custodian to do the above calculations if the answers to the above two questions are “no.”
• Are there other variants that I am missing that would require other techniques to apportion a dollar limitation between a Roth IRA maximum contribution and a balance to a traditional IRA?
Permalink Submitted by Eric H Silverman on Thu, 2020-12-24 02:36
I’m sorry that the number don’t line up evenly, as they did in the text that I posted and that the differences between the line numbers and the dollar amounts are only one space, rather than the tabbed differences to line up.
Permalink Submitted by David Mertz on Thu, 2020-12-24 03:30
You are mishandling the calculation of modified AGI for the purpose of the Roth IRA contribution. Line 4 of Worksheet 2-1 simply undoes whatever influence the traditional IRA deduction has on AGI, so the amount of the TIRA deduction is irrelevant to the calculation of MAGI for a Roth contribution. In this case, this MAGI is simply AGI without any TIRA deduction.
Permalink Submitted by Eric H Silverman on Thu, 2020-12-24 05:00
I understand and agree with the logic of your response, but the worksheet asks for a number, not a concept. Furthermore, the taxpayer will have to complete, but not file the Publication 590-A worksheets to obtain the traditional IRA contribution and the deductible portion in order to complete Form 1040. How does the taxpayer know what his traditional IRA contribution and deduction are without first determining his Roth IRA maximum contribution and subtracting it from $7,000? It would be easier if the taxpayer is an active participant in a pension plan and has no deduction for a traditional IRA contribution because his MAGI is above the deductibility corridor ceiling.I think I made a mistake in my Worksheet 2-2 question for the case where there is no deduction for the traditional IRA contribution:If the traditional IRA contribution is less than $700, say $500, then Line 10 is $7,000 – $500 = $6,500 and Line 11 is the lesser of $6,500 and $6,300 or $6,300 and the total IRA contribution is $6,300 + $500 + $6,800, which is less than $7,000. If the traditional IRA contribution is more than $700, say $1,000, then Line 10 is $7,000 – $1,000 = $6,000 and Line 11 is the lesser of $6,000 and $6,300 or $6,000 and the total IRA contribution is $6,000 + $500 + $6,000, which is also less than $7,000. The part about the traditional IRA contribution of less than $700 is good, but the number $500 in the final sentence of the paragraph should be $1,000. This was because I used “copy and paste” to make changes to the prior example, but didn’t change $500 to $1,000. If $500 is changed to $1,000, then the total contributio is the desired $7,000, but less money goes into the more advantageous Roth IRA.
Permalink Submitted by Eric H Silverman on Thu, 2020-12-24 05:05
I used the indent function on the gray taskbar atop the Comment box to indent the following:If the traditional IRA contribution is less than $700, say $500, then Line 10 is $7,000 – $500 = $6,500 and Line 11 is the lesser of $6,500 and $6,300 or $6,300 and the total IRA contribution is $6,300 + $500 + $6,800, which is less than $7,000. If the traditional IRA contribution is more than $700, say $1,000, then Line 10 is $7,000 – $1,000 = $6,000 and Line 11 is the lesser of $6,000 and $6,300 or $6,000 and the total IRA contribution is $6,000 + $500 + $6,000, which is also less than $7,000. The part about the traditional IRA contribution of less than $700 is good, but the number $500 in the final sentence of the paragraph should be $1,000. This was because I used “copy and paste” to make changes to the prior example, but didn’t change $500 to $1,000. If $500 is changed to $1,000, then the total contributio is the desired $7,000, but less money goes into the more advantageous Roth IRA.It didn’t work.
Permalink Submitted by David Mertz on Thu, 2020-12-24 14:01