10 Must-Know IRA Terms, Part 1

Here's a very good resource from Yahoo titled ten must-know IRA terms that I'll be posting on over the next few days. We'll take a few terms at a time so we can digest them all. That said, here's part 1:

Adjusted gross income, or AGI -- Used to calculate federal income tax, your AGI includes all the income you received over the course of the year, such as wages, interest, dividends and capital gains, minus things such as business expenses, contributions to a qualified IRA, moving expenses, alimony and capital losses, interest penalty on early withdrawal of bank CD certificates, and payments made to retirement plans such as SEP and SIMPLE IRAs.

Contribution -- IRA contributions are limited to $4,000 a year in 2005 and 2006 if you're younger than 50. If you're 50 or older, the limits are $4,500 in 2005 and $5,000 in 2006. Contributions are classified as either tax deductible or nondeductible.

This is going to be a good, solid series -- but don't expect to be entertained. ;-)

Click here to read part 2 of this series.

Comments

[David]

What about contributions to a 401(k). Can those be deducted to get the AGI?

Thanks.

[JLP at AllThingsFinancial]

David,

Hi! FMF asked me to answer this question.

Yes, your before-tax contributions to your 401(k) come right off the top of your income. Say you make $50,000 this year and you put $5,000 into your 401(k). Your taxable income on your W-2 for 2006 (the amount you enter on Line 7 of form 1040) will be $45,000.

Hope this helps.

[David]

But does taxable income = AGI?

Let's pretend you earned in Salary $110,000, but put $14000 in your 401(k). Can I contribute to a Roth IRA in this year?

[JLP at AllThingsFinancial]

David,

Does taxable income = AGI?

No. AGI is the amount listed on line 37 on Form 1040. I would post a link to the form but FMF doesn't allow html or links. So, go to IRS.gov and look up Form 1040.

Roth restrictions are based on Modified AGI, which is calculated by taking your AGI and adding back in:

1. Student loan interest (line 33)
2. Tuition and fees deduction (line 34)
3. Excludible employer-provided adoption benefits
4. Excludible U.S. Savings Bond interest
5. Certain excludible foreign and U.S. possession income (I haven't the slightest idea what this is)

So, based on your example, if you didn't have any of the above deductions, your AGI and MAGI would both be $96,000. You would therefore be subject to a phaseout (if you are single). To calculate the amount of the phaseout, look at page 56 of Publication 590. There is a handy little table to help you out.

Best of luck.