As of 2019, you can contribute $6,000 ($7,000 if you are 50 or older) to a Roth IRA every year (the limits for 2018: $5,500 and $6,500, respectively). However, this amount could be reduced or eliminated entirely if your modified adjusted gross income (MAGI) is too high. Fortunately, there are ways to reduce taxable income. For starters, you need to know your MAGI for Roth IRA purposes.
Calculate Your MAGI
Start with your adjusted gross income (AGI), which appears at the bottom of page one of your 1040 tax form. From that amount subtract the total amount converted or rolled over from a traditional IRA or qualified retirement plan to a Roth IRA.
Add deductions for contributions to a traditional IRA plus deductions for 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 work sheet 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 $120,000 and $135,000 ($122,000 and $137,000 in 2019), your Roth IRA contribution limit will be reduced. If you are married filing jointly, reductions occur between $189,000 and $199,000 ($193,000 and $203,000 in 2019). If your MAGI is $135,000 or higher (single) or $199,000 and above (married filing jointly), you can’t contribute at all (for 2019 those figures are $137,000 or $203,000).
Here are some ways to reduce your income so you can qualify to contribute to a Roth IRA.
Contribute at Work
Contributions you make to a workplace retirement plan such as a 401(k), 403(b), 457 or thrift savings plan are not included in AGI. In 2019 contribution limits are $19,000, and, if you are 50 or older, you can contribute up to an additional $6,000, for a total of $25,000 (the 2018 limits are $18,500 and $24,500, respectively).
Contribute to an HSA
If your employer-sponsored health insurance 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. (The limits are $3.450 for singles and $6,900 for families in 2018).
Contribute to an FSA
A variation on the HSA is called a flexible spending account (FSA). In 2018 you can put up to $2,650 (pretax) into an FSA if your employer offers it. Typically, there will be 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, 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).
Reduce Schedule C Income
Self-employment income claimed on Schedule C is another area where you may be able to find deductions that reduce the amount that ends up counting toward your MAGI. In addition to normal business-related deductions, consider contributions to a simplified employee pension (SEP), solo 401(k) or other tax-deductible retirement plan, if appropriate. While you’re at it, check nonbusiness deductions as well.
Claim Those 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 must be followed. Consult your tax advisor to make sure you are not in violation.
The Backdoor Option
A backdoor Roth contribution is another popular option. Make a nondeductible IRA contribution and then convert it to a Roth. Alternatively, convert a Traditional IRA, though you will have to pay taxes on contributions and earnings.
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 your MAGI can’t be reduced enough for a regular Roth IRA.