On the Fence

I was chatting recently with a client about Roth IRA eligibility for 2007. He and his spouse are both young doctors. She finished her residency in late 2007 he will finish his midway through 2008. As residents, they make decent salaries but not what most people think of when they think of doctors incomes. Their combined gross income in 2007 was approximately $164,000. He wanted to know if they should file Married, Filing Separately to qualify for 2007 Roth IRA contributions.

He was looking at the Roth eligibility phase outs which in 2007 are $156,000 - $166,000 for Married Filing Jointly. Below $156,000 there is full eligibility for a Roth IRA. Above $166,000 you are no longer eligible. In between, you are eligible for a limited contribution. Seeing an income that is almost at the top of the phase out range, he is looking for a way to make the biggest contribution the law will allow.

Filing separate returns is not the answer. A CPA can address a number of other issues this would spawn, but the phase outs for 2007 Roth contributions for Married Filing Separately are $0 - $10,000. Since both he and his wife have incomes which exceed $10,000, filing separately would easily disqualify them both from contribution to a Roth.

But all hope is not lost. As we looked into their income I discovered that the $164,000 is their gross income and includes their contributions to qualified retirement plans. Together, they contributed well over $30,000 to their employer sponsored pre-tax retirement plans. The Roth IRA phase outs are based on Adjusted Gross Income (AGI), not gross income. Contributions to pre-tax retirement plans are not included in AGI. So now it looks like their AGI will be far below the $156,000 threshold and they can make a maximum contribution to their Roth IRA's for 2007 as long as they do so before April 15^th.

So what is Adjusted Gross Income? Basically, AGI includes all taxable income minus deductions for things like:

• Business expenses
• Educator expenses
• Certain losses from the sale or exchanges of property
• Pre-tax retirement contributions
• Penalties or forfeitures of interest paid because of premature withdrawal of funds on a bank time deposit
• Alimony payments
• Reimbursed expenses of employees and certain expenses of performing artists
• Certain qualifying moving expenses
• Contributions to a HSA (Health Savings Account) or MSA (Medical Savings Account)
• Interest on certain student loans
• Tuition and fees

Other deductions are taken after AGI is calculated which is why deductions between Gross Income and Adjusted Gross Income are referred to as "above the line".

Curious to what your AGI is? On the 1040 check line 37 at the bottom of the first page.

On the fence by eckybay

Comments

[CiaranFromChance]

Hello Art,

Actually doing a little catch up reading this Sunday on last week's carnival. Just came across your article on the Roth IRA, simple, concise and helpful. I stumbled it.

Anyway, I write about the Roth IRA a lot, as my post was also a part of this carnival.

Just wanted to touch base say hello and say I'll be dropping by.

[Art Dinkin]

Hi Ciaran. Thanks for the kind words and the stumble. Glad to hear you will be back and I'll be checking out your blog too! :)