Modified Adjusted Gross Income (MAGI): What is it and why does it matter?

Posted on July 30, 2023 in guide

Modified adjusted gross income (MAGI) is a calculation used by the IRS to determine eligibility for certain tax benefits, such as the Roth IRA, the Saver's Credit, and the Health Savings Account (HSA).

MAGI is calculated by taking your adjusted gross income (AGI) and adding back certain deductions, such as student loan interest, tuition and fees, and contributions to retirement accounts.

Why does MAGI matter?

MAGI matters because it is used to determine eligibility for certain tax benefits. For example, if your MAGI is above the limit for the Roth IRA, you will not be able to contribute to a Roth IRA.

Additionally, MAGI is used to calculate the amount of the Saver's Credit and the HSA contribution limits. If your MAGI is above the limit for the Saver's Credit, you will not be eligible for the credit. And if your MAGI is above the HSA contribution limit, you will not be able to contribute the full amount to an HSA.

How is MAGI calculated?

MAGI is calculated by taking your AGI and adding back certain deductions, such as:

  • Student loan interest
  • Tuition and fees
  • Contributions to retirement accounts (401(k), IRA, HSA, etc.)

What are the MAGI limits for the Roth IRA, Saver's Credit, and HSA?

The MAGI limits for the Roth IRA, Saver's Credit, and HSA are as follows:

  • Roth IRA: In 2023, you can contribute to a Roth IRA if your MAGI is $208,000 or less if you are filing your taxes as single, or $416,000 or less if you are filing your taxes as married filing jointly.
  • Saver's Credit: In 2023, you may be eligible for the Saver's Credit if your MAGI is below $30,000 if you are filing your taxes as single, or $60,000 if you are filing your taxes as married filing jointly.
  • HSA: In 2023, the contribution limit for an HSA is $3,850 if you are under age 50, or $7,750 if you are age 50 or older. However, if your MAGI is above $310,000 if you are filing your taxes as single, or $620,000 if you are filing your taxes as married filing jointly, you will not be able to contribute to an HSA.

What if my MAGI is above the limit?

If your MAGI is above the limit for the Roth IRA, Saver's Credit, or HSA, you may still be able to contribute to these accounts, but you may not be able to contribute the full amount.

For example, if your MAGI is above the limit for the Roth IRA, you may still be able to contribute to a Roth IRA, but you will only be able to contribute the amount that is allowed for your filing status minus your MAGI.

How can I lower my MAGI?

There are a few things you can do to lower your MAGI:

  • Make pre-tax contributions to your 401(k) or other retirement accounts.
  • Make contributions to a Health Savings Account (HSA).
  • Defer income by participating in a Section 401(k) plan or other retirement plan.
  • Take advantage of tax-advantaged investments, such as municipal bonds.

Consult with a financial advisor

If you are unsure about whether you are eligible for certain tax benefits or how to lower your MAGI, you should consult with a financial advisor. They can help you understand the tax implications of your decisions and make sure that you are taking advantage of all of the tax benefits available to you.

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