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December 16, 2021
Question

Do standard 401k contributions get deducted from gross income when calculating MAGI?

  • December 16, 2021
  • 1 reply
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I'm trying to determine if I am eligible to open a Roth IRA account and make a full contribution. I am above the income limit to make a full contribution unless my contributions to my standard 401k  can be deducted from my gross income like they are when determining taxable income.

1 reply

DanielV01
Employee
December 16, 2021

It depends on your point of view.  Standard 401(k) amounts are not included in gross income on your tax return and will be accounted for on your Form W-2.  Since that is the case, you can't deduct them from what is reported on the 1040 because they've already been deducted, and won't be added back.  If you are trying to calculate this from a paystub, (not recommended, but you don't have access to your W-2 yet),  try to see if you can determine the "Federal Taxable Income"  on the paystub.  If that isn't there, then you should be correct in subtracting your employee elected deferral only for the purpose of the MAGI calculation.  And once deducted, the contributions are not added back for the MAGI calculation.  See this link for more information:  Worksheet 2-1. Modified Adjusted Gross Income for Roth IRA Purposes

 

If you believe you are running "too close for comfort" on the income limits, you can still make a "back-door" Roth contribution.  With pending legislation, it would be wise to complete the back-door before the end of December.  With this provision, you may contribute to a traditional, non-deductible IRA, and then immediately convert the contribution to a Roth-IRA.  As long as you do not have other funds in a traditional IRA, this procedure will work to move these funds into a Roth without worrying about the income limits.  There is slightly more reporting required, but the net result is the same.

Again, though, there is strong talk that pending legislation may eliminate this type of conversion in 2022.  So if you want to guarantee the contribution, do so before the end of the month.  While it may be true that you have until April 15th to make a reportable contribution for 2021, conversions must be completed by December 31 to qualify for 2021 reporting.  If you wait until 2022 to contribute to 2021/convert, you could lose the conversion if the law changes.

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