Lower your taxable income and save more for retirement
- You can’t contribute to a Roth IRA if your modified adjusted gross income (MAGI) is too high.
- There are strategies that can help lower your MAGI.
- If you can’t lower your MAGI enough, you may still be able to contribute.
As of 2019, you can contribute $6,000 ($7,000 if you are 50 or older) to a Roth IRA each year. However, this amount could be reduced or eliminated entirely if your modified adjusted gross income (MAGI) is too high. Fortunately, there are ways to lower your taxable income. Here’s how.
Calculate Your MAGI
First, you need to know your MAGI for Roth IRA purposes. Start with your adjusted gross income (AGI), which appears on line 8b of your 1040 tax form.
Next, add back any deductions you took for contributions to a traditional IRA, interest on student loans, tuition, and fees. Also add exclusions for qualified bond interest, employer-provided adoption benefits, and a few other deductions. For more, including a detailed worksheet to calculate MAGI, see IRS Publication 590A.
Roth IRA Contribution Limits
Compare your MAGI with the following limits. If your filing status is single and your MAGI falls between $122,000 and $137,000, your Roth IRA contribution limit will be reduced. If you’re married filing jointly, reductions occur between $193,000 and $203,000. With a MAGI of $137,000 or higher (single) or $203,000 and above (married filing jointly), you can’t contribute at all.
Here are some ways to reduce your income so you can qualify to contribute to a Roth IRA.
Contribute at Work
Pre-tax contributions you make to a workplace retirement plan such as a 401(k), 403(b), 457, or thrift savings plan are deducted from your taxable income. For 2019, the contribution limits are $19,000. If you’re 50 or older, you can contribute up to an additional $6,000, for a total of $25,000.
Contribute to an HSA
If your health insurance policy has a deductible of at least $1,350 (single) or $2,700 (family), you qualify to make pretax contributions to a health savings account (HSA). In 2019, the contribution limit is $3,500 (single) or $7,000 (family), with a $1,000 catch-up contribution if you are 55 or older.
Important: Money in your HSA doesn’t expire. It’s yours even if you switch your employer or health insurance policy.
Contribute to an FSA
A variation on the HSA is called a flexible spending account (FSA). In 2019, you can put up to $2,700 (pretax) into an FSA if your employer offers it. Typically, there’s an open-enrollment period in the fall, during which you must sign up. Normally, you can’t contribute to both an FSA and HSA in the same year. An exception is when the FSA is considered HSA compatible.
Contribute to a Dependent Care FSA
If you pay for childcare or adult daycare, you may be able to contribute up to $5,000 pretax to a dependent care flexible spending account. Like a regular FSA, this one typically requires you to sign up during an open enrollment period, unless you have a qualifying event (such as the birth of a child).
Lower Your Schedule C Income
Self-employment income claimed on Schedule C is another area where you may be able to find deductions that lower your MAGI.
In addition to normal business-related deductions, consider contributions to a simplified employee pension (SEP), solo 401(k), or some other tax-deductible retirement plan, if appropriate. While you’re at it, check for nonbusiness deductions, as well.
Claim Capital Losses
If you have capital losses that exceed capital gains, you can apply up to $3,000 against ordinary income. This strategy is often overlooked as a way to reduce MAGI. Claiming capital losses is complex, and the IRS has rules that you must follow. Consult your tax advisor to make sure you’re in compliance.
Contribute to a Roth 401(k)
If a Roth 401(k) is available through your employer, you might want to use that as your Roth option. There are no income restrictions on a Roth 401(k), and in 2019 you can contribute up to $19,000 ($25,000 if you are 50 or older).
Of course, this won’t reduce your MAGI. But it will provide you a way to invest in a Roth retirement plan if you can’t reduce your MAGI enough for a regular Roth IRA.
Backdoor Roth IRA
Another option is a backdoor Roth IRA. This is a legal way to get around Roth IRA income limits by moving funds from a traditional IRA into a Roth.
This doesn’t lower your MAGI, and instead, it actually increases your taxable income for the year (you’ll owe taxes on any amount you convert). But, you’ll be able to fund a Roth and take advantage of the tax-free growth on contributions and earnings.