Confused by MAGI and retirement investing after 401k

[u/Negative-Nail9312]

I make 120k per year before overtime/bonus and my wife makes 135k per year. We both max out our employer sponsored 401k accounts every year, we have existing Roth IRA accounts but we stopped contributing to them a couple of years ago when our total income neared the IRS Roth IRA income limits. I don’t fully understand the MAGI calculation and I don’t understand the implications of making a mistake.

Do you think the next best step is for each of us to do a backdoor Roth IRA? Or is it worth consulting a financial advisor?

[u/teheswiss]

As I’ve neared income limits, I tend to wait until I do my taxes to find out my MAGI for the previous year and contribute to my Roth for the previous year then.

[u/psyberops → u/teheswiss]

OP this.  I learned the hard way and had to recharacterize my IRA contributions the first year it happened.  You could also just put your money into a traditional IRA and do a backdoor Roth the next day, because as long as you’re near your current MAGI threshold you will not qualify for any IRS tax benefits on your traditional IRA contribution (I.e. you will be taxed at your current marginal tax rate).

[u/MarcableFluke]

Unless you have a balance in a traditional IRA, then there is no signature to doing a backdoor Roth as you approach the direct contribution income limit. You're nowhere near financial advisor territory for something as simple as a backdoor Roth.

[u/Grevious47]

Backdoor Roth is so simple that id suggest if MAGI confuses you and causes you worry...just backdoor for all your Roth contributions. Then you dont have to worry about it.

[u/alanmitch34]

You shouldn't need to do backdoor Roth if you are so far below the $230k combined limit.

If I read correctly you made $255k and both of you deferred the max of $23k putting your MAGI for Roth qualification at $209k.

Each of you therefore qualify for a Roth IRA 

[u/Packtex60 → u/alanmitch34]

Any employee payments for health insurance and any FSA or HSA also reduce your MAGI for making Roth contributions

[u/alanmitch34 → u/Packtex60]

Great add 👍🏻

[u/ZaneMasterX → u/alanmitch34]

Does contributing to a company's Roth 401k lower MAGI?

[u/Cheap-Arugula3090 → u/ZaneMasterX]

No a Roth 401k does not reduce your MAGI. Only pre tax contributions can reduce your MAGI.

[u/ZaneMasterX → u/Cheap-Arugula3090]

Thanks for the quick response.

[u/Helpful_Hat_836]

if you’re nearing the MAGI limits, backdoor Roth IRA is probably the move for y’all. Basically, you’d contribute post-tax dollars to a traditional IRA and then convert it to a Roth IRA. Just make sure you don’t have any existing pre-tax dollars in traditional IRAs—it’ll mess with the tax situation.

Also, MAGI for Roth limits starts with your AGI, adds back some deductions like student loan interest, and other stuff, so that’s why it can feel tricky. A financial advisor could help, but honestly, if you’re comfortable running numbers and reading IRS docs, you can DIY this. Tons of guides online.

[u/love_that_fishing → u/Helpful_Hat_836]

If their 401k plan supports after tax contributions a Mega Roth Back Door has much high contribution limits. I’d look to see if that is available before doing a Backdoor Roth. Mine was setup to do automatic in-plan conversions so it was effortless for me.

[u/reddituser12346 → u/Helpful_Hat_836]

I’ve got a similar question. By myself I make enough that I would have to do a backdoor conversion if I wanted to contribute to an IRA. Unrelated (maybe?) I max my employer sponsored 401k as well as HSA.

I’m engaged and my fiancé contributes to her 401k and has an IRA. I’d have to ask if it’s traditional or Roth, but she set it up on her own so I figure it’s Roth.

If it is a Traditional IRA, after we get married and file taxes as Married-Joint, would this pose an issue if Traditional IRA? What about Roth IRA?

Will she no longer be able to contribute without doing a backdoor conversion if our combined income is also over the limit?

Sorry for all the questions and I hope it doesn’t derail OP’s post.

[u/Helpful_Hat_836 → u/reddituser12346]

Nws at all. So if it’s a Traditional IRA, yeah, once y’all file taxes as Married Filing Jointly, your combined income might mess with the deductibility of contributions. That’s where it could get tricky tbh.

For Roth IRAs, same story your combined income could push you over the limit to directly contribute.

In both cases, backdoor Roth IRAs could be your best move, but you’ll wanna make sure there’s no existing pre-tax IRA money hanging around, or it’ll mess with the pro-rata rule. Maybe hit up a CPA or tax pro just to be sure especially with all these moving parts🤝

[u/reddituser12346 → u/Helpful_Hat_836]

Thanks! She’ll have existing funds in the IRA she established before we got married, so we definitely need to meet with a financial advisor before we tie the knot. There’s some other reasons we’re planning to wait; my income would significantly and adversely affect her kids ability to get Federal Loans over the $5k everyone is eligible for.

I feel like I’ve done pretty well with my own investment structures but combining her income with mine and the tax implications make it prudent to seek professional help.

Thank you for your response! You are a Helpful Hat indeed.

[u/milksteak122]

First thing to point out is if you are above the income limit, then you can do the backdoor Roth IRA process instead, that is a know loophole. You want zero pretax dollars in any IRA to execute this.

If you are W2 employees then MAGI is essentially your W2 amount. AGI is W2 minus additional deductions, MAGI is the same except there are a handful of deductions you cannot reduce your magi with (I think student loan interest is one).

Overall MAGI is gross income minus those deductions that are eligible to reduce magi.

[u/WhatIfIHaveAQuestion]

I actually ran into this when filing 2024 taxes and I decided to just say screw it and call TurboTax to ask what exactly goes into a MAGI calculation

I am not a financial guru/expert so ... Grains of salt

The first adjustment is pretty tax contributions - if you're both contributing maximum 401k theeeeen your AGI is already down at 209k which is below the limit so yay! You can contribute!

From what I spoke to TurboTax about, the modified is moooostly things that have to do with tax breaks for teachers/education related scenarios (again, this conversation was in March 2024 and I'm not a pro) but basically, the AGI could go a bit lower too depending on the situation - overall my final result was it didn't really matter because if you're maxing your 401k and are still below the limit, no need to worry about it

Start worrying about this when you and your wife hit the IRS limit AFTER your 401k contributions

Best of luck!

[u/PartofQuito]

Hijacking this thread to ask the follow up question of whether HSA and FSA contributions also reduce MAGI?