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401(k)s

7 Ways to Reduce Your Income to Qualify for Roth IRA Contributions

If you're just above the income cutoff for contributions, these strategies will help you meet it.

Question: What is the definition of "modified adjusted gross income" to qualify to contribute to a Roth IRA? I'm close to the income limit and am trying to figure out how I can lower my MAGI so I can qualify this year.

Answer: The definition of modified adjusted gross income varies depending on the tax break. The calculation to qualify for Roth IRA contributions starts by taking your adjusted gross income from the bottom of page 1 of Form 1040 and adding back certain deductions and exclusions you took during the year.

4. Contribute to a dependent-care flexible-spending account. You may be able to contribute up to $5,000 pretax to a dependent-care FSA to pay for the cost of caring for a child younger than 13 while you and your spouse work. You generally must sign up to make those contributions during open enrollment in the fall, but you may be able to make changes midyear if you have a qualifying event, such as if getting married or divorced or having a baby, or if you move or the cost of care changes. See How to Change Dependent-Care FSA Contributions Midyear.

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5. Reduce any income from self-employment. If you have any income from your own business, even if you just do freelance work on the side, make the most of tax breaks for the self-employed. See the Instructions for Schedule C for more information about which expenses you can deduct. For more information, see Most Overlooked Tax Breaks for the Self-Employed. Contributions to a self-employed Simplified Employee Pension, solo 401(k) or other tax-deductible retirement plan can also reduce your AGI. See How Self-Employed Workers Can Save for Retirement.

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6. Sell taxable investments for a loss. Capital losses first offset capital gains. After that, you can apply your losses to offset up to $3,000 of ordinary income (any additional losses can be carried over for future tax years). See Understanding Capital Gains and Losses.

7. Make the most of other deductions that reduce your AGI. See if you qualify for any other deductions on page 1 of your Form 1040 that aren't added back into the MAGI calculation, such as for moving expenses. See The Key Factor in Claiming a Tax Break for Moving. Also see IRS Publication 521, Moving Expenses.

Make a Backdoor Contribution to a Roth

If you still don't fall below the modified adjusted gross income cutoff, you can make a non-deductible IRA contribution and then convert it to a Roth. If you don't have any other money in a traditional IRA, you'll have to pay taxes only on the earnings when you convert. If you do have other IRA money, your tax liability will be based on the ratio of nondeductible contributions to the total balance in all of your traditional IRAs. See How High Earners Can Set Up a Roth IRA for more information.

Also see Smart Ways for High Earners to Contribute to Roth IRAs. For more information about the benefits of Roth IRAs, see Why You Need a Roth IRA.

Got a question? Ask Kim at askkim@kiplinger.com.

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