NOTE: Addressing inquiries regarding Modified Adjusted Gross Income MAGI falls within the scope of tier 1 support, except for specific customer scenarios as determined by a Betterment Senior Associate through the Helpdesk channel.
Understanding Modified Adjusted Gross Income (MAGI)
Modified Adjusted Gross Income (MAGI) is a key concept in US tax law. Essentially, it's a way of calculating income that's slightly different from a taxpayer's Adjusted Gross Income (AGI).
To understand MAGI, it's helpful to first clarify AGI:
Gross Income: This refers to all of an individual's earnings within a given year. Sources of gross income can include wages, salaries, tips, interest, dividends, and other forms of income.
Adjusted Gross Income (AGI): This is calculated by taking gross income and subtracting specific deductions allowed by the IRS. Examples of these deductions include contributions to traditional Individual Retirement Accounts (IRAs) and student loan interest payments. AGI can be found on Form 1040 of the US tax return.
MAGI Calculation: MAGI is then calculated by taking the AGI and adding back certain deductions. The specific deductions added back can vary depending on the tax benefit being considered.
Why is MAGI important?
The Internal Revenue Service (IRS) uses MAGI to determine a taxpayer's eligibility for various tax benefits, deductions, and credits. These can include:
Roth IRA contributions: MAGI is a factor in determining both eligibility to contribute to a Roth IRA and the maximum allowable contribution amount.
Traditional IRA deductions: A taxpayer's MAGI influences whether contributions to a traditional IRA are deductible.
Affordable Care Act (ACA) subsidies: MAGI is used to calculate eligibility for subsidies that help individuals purchase health insurance through the ACA marketplace.
Education tax credits: Eligibility for certain education tax credits may be based on MAGI.
Reference: Here.
A taxpayer's Modified Adjusted Gross Income (MAGI) is used to determine how much, if any amount, they are eligible to contribute to a Roth IRA.
The calculation of a taxpayer's MAGI for Roth IRA contribution purposes begins with their Adjusted Gross Income (AGI). From there, certain modifications are made to the MAGI. Common modifications are outlined below. For a step-by-step guide to calculating MAGI in this context, refer to IRS Publication 590-A, Worksheet 2-1.
Start with Adjusted Gross Income (AGI): A taxpayer's Adjusted Gross Income (AGI) can be found on IRS Form 1040, Page 1, Line 11. (Note: Form line numbers may change, so always refer to the current tax form.)
Subtract Roth Conversions: Taxpayers should subtract any Roth IRA conversions they completed during the tax year. While these are included in AGI, they are not counted towards MAGI for Roth IRA contribution limits and must be subtracted.
Add Back Common Deductions: Certain deductions taken by the taxpayer do not count towards MAGI for Roth IRA eligibility. These deductions should be added back. Common examples include:
Traditional IRA contributions
Student loan interest
Tuition and fees (if applicable)
Reference to Macros:
Investing :: Navigation :: Edit MAGI (Roth IRA recurring deposit max out)
: Chat :: Investing :: IRA :: IRA Max Out Error
It is possible that recurring deposits to a customer's Roth IRA are being paused based on the inputs provided to Betterment to indicate the taxpayer's MAGI (Modified Adjusted Gross Income) and tax filing status. These factors determine the amount of Roth contributions a Betterment customer is eligible to make per IRS regulations. If recurring deposits are set up to a Roth IRA at Betterment, but these inputs indicate that the taxpayer is ineligible to make Roth contributions, Betterment will automatically mark Roth auto-deposits as “maxed out.”
To check MAGI and tax filing status inputs and ensure Betterment has the correct information on file, or to make any necessary changes, taxpayers can do so by going through the one-time deposit flow for their Roth IRA: Deposit > Roth IRA > One-time > "Calculate Roth contribution limit" > Submit.
