What is Modified Adjusted Gross Income (MAGI)?
Modified Adjusted Gross Income, also known as MAGI can determine if you are eligible to contribute to certain accounts, get tax deductions, or use some useful retirement strategies. Let’s keep it simple and see how MAGI relates to your 401(k), Traditional IRA, Roth IRA, and SEP IRA.
Modified Adjusted Gross Income (MAGI)
Modified Adjusted Gross Income first starts with your Adjusted Gross Income (AGI), which is your total income for the year (wages, business income, investment gains, etc.) minus certain deductions (like student loan interest or contributions to a Traditional IRA if you qualify).
Then the IRS says, “Let’s tweak that number.” They add back certain deductions and exclusions, things like tax-free Social Security benefits, tax-exempt interest, and foreign income. Exactly which items get added back depends on the tax rule in play, and different rules can affect everyday financial decisions:
- IRA Contributions: MAGI determines how much you can contribute to a Roth IRA or deduct for a Traditional IRA if you or your spouse have a workplace plan.
- Social Security Taxation: Retirees may owe tax on a portion of benefits, based on combined income.
- Health Insurance Premium Credits: Health insurance help through the Marketplace (the government site for buying insurance) is based on MAGI, so even income you don’t usually pay tax on can reduce the financial help you receive.
- Education Credits: Credits like the American Opportunity and Lifetime Learning Credits phase out based on MAGI, not just taxable income.
- Net Investment Income Tax (NIIT): High earners may owe an extra 3.8% on investment income if MAGI exceeds thresholds, with certain exclusions added back.
Think of MAGI as your AGI with a few extras added back. The reason it exists? To determine if you’re eligible for certain tax benefits, including whether you can make full Roth IRA contributions or deduct Traditional IRA contributions.
Why MAGI Matters for Retirement
MAGI isn’t just a tax term. It directly impacts your retirement planning in three big ways:
- It can limit Roth IRA contributions: Once your MAGI exceeds certain income thresholds, the amount you can contribute gradually decreases until it is no longer allowed..
- It affects Traditional IRA deductibility: You can always contribute to a Traditional IRA regardless of income, but whether you can deduct that contribution on your taxes depends on your MAGI (and whether you have a retirement plan at work).
- It determines access to certain tax credits and benefits: Some retirement-related credits and strategies have MAGI cutoffs.
If you’re not aware of where your MAGI falls, you might accidentally plan on making contributions you’re not eligible for or miss out on strategies you could use.
MAGI and Your 401(k)
When it comes to 401(k)s, your MAGI doesn’t hold you back on contributions. Whether you earn $40,000 or $400,000, you can generally contribute to your 401(k) up to the annual limit ($23,500 in 2025, plus a $7,500 catch-up if you’re 50 or older).
Here’s where MAGI and 401(k)s intersect. If you participate in a 401(k) at work, the MAGI thresholds for deducting Traditional IRA contributions are lower. In other words, having a 401(k) can make it harder to get a deduction for a Traditional IRA if your income is higher.
So even though MAGI doesn’t cap your 401(k) contributions, it could affect how other retirement accounts work alongside it.
MAGI and Traditional IRAs
Traditional IRAs come with two main rules to keep in mind:
- In 2025, anyone with earned income can contribute up to $7,000 or $8,000 if you’re 50 or older.
- The deductibility of your contribution on your taxes is dependent on your MAGI and whether you have a workplace retirement plan like a 401(k).
A deductible contribution reduces your taxable income for the year, which can lower the amount of tax you owe. If your income is too high, the deduction phases out or disappears, though you can still contribute without the deduction.
Let’s break down how MAGI affects your deduction based on your filing status and workplace coverage:
Single or Head of Household covered by a plan at work:
- MAGI $79,000 or less: Full deduction allowed
- MAGI $79,000 – $88,999: Reduced deduction
- MAGI $89,000 or more: No deduction
Married filing jointly or qualifying widow(er) covered by a plan at work:
- MAGI $126,000 or less: Full deduction allowed
- MAGI $126,000 – $145,999: Reduced deduction
- MAGI $146,000 or more: No deduction
Married filing separately covered by a plan at work (or with a spouse who is covered):
- MAGI $10,000 or less: Reduced deduction
- MAGI $10,000 or more: No deduction
Single, Head of Household, or qualifying widow(er) NOT covered by a plan at work, but spouse is covered:
- Any MAGI: Full deduction allowed
Married filing jointly or separately NOT covered by a plan at work, but spouse is covered:
- MAGI $236,000 or less: Full deduction allowed
- MAGI $236,000 – $245,999: Reduced deduction
- MAGI $246,000 or more: No deduction
If your MAGI is below the IRS threshold, you get a full deduction. If you fall into the “phase-out” range, your deduction shrinks. Additionally, if your MAGI exceeds the limit, you won’t receive a deduction, but you can still make a non-deductible contribution.
Why make a non-deductible contribution? Some use this as part of a “backdoor Roth IRA” strategy (which we’ll cover shortly). This is another reason why understanding your MAGI matters.
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Get startedMAGI and Roth IRAs
When it comes to Roth IRAs, MAGI is the gatekeeper.
Roth IRAs let you contribute after-tax dollars now so your withdrawals in retirement can be tax-free. Here’s the catch: your ability to contribute depends on your MAGI, and there are income limits you need to know.
Here’s the rule:
- If your MAGI is below the lower limit, you can contribute the full amount, up to $7,000 in 2025, or $8,000 if you’re 50 or older.
- If your MAGI falls within the phase-out range, your contribution amount is reduced.
- If your MAGI is above the upper limit, you cannot contribute directly to a Roth IRA at all.
Let’s break down the limits by filing status:
Married filing jointly or qualifying widow(er):
- MAGI less than $236,000: Full contribution allowed
- MAGI between $236,000 and $246,000: Reduced contribution
- MAGI $246,000 or more: No contribution
Single, head of household, or married filing separately (if you didn’t live with your spouse during the year):
- MAGI less than $150,000: Full contribution allowed
- MAGI between $150,000 and $165,000: Reduced contribution
- MAGI $165,000 or more: No contribution
Married filing separately and lived with your spouse at any time during the year:
- MAGI less than $10,000: Reduced contribution
- MAGI $10,000 or more: No contribution
What if you earn too much to contribute directly? There’s a workaround called the “backdoor Roth” strategy. It involves making a non-deductible contribution to a Traditional IRA and then converting it to a Roth IRA. However, this can get complicated if you already have pre-tax money in other IRAs, since your MAGI will still affect the tax consequences. When in doubt, consider consulting with a financial or tax advisor.
Understanding your MAGI is key to navigating these rules and making the most of your retirement savings.
MAGI and SEP IRAs
SEP IRAs, which are popular amongst self-employed individuals and small business owners, keep things simple because your MAGI does not limit how much you can contribute. In 2025, you can contribute up to 25% of your net earnings from self-employment, up to a maximum of $70,000.
While SEP contributions don't have MAGI limits, they do reduce your AGI, which in turn can lower your MAGI. That can indirectly help you qualify for Roth IRA contributions or Traditional IRA deductions.
Example: For self-employed individuals nearing the Roth IRA income limit, a SEP IRA contribution can lower your MAGI, potentially allowing you to qualify for Roth IRA contributions.
Why You Should Keep an Eye on MAGI
Even though MAGI isn’t a number you see on your paycheck, it’s worth tracking, especially if you have multiple retirement accounts. Here’s why:
- It keeps your contributions legal: The IRS can hit you with a penalty for contributing to a Roth IRA when you’re not eligible.
- It can increase your IRA opportunities: Lowering your MAGI through pre-tax retirement contributions, HSA deposits, or other deductions can open up eligibility for Roth IRAs or bigger Traditional IRA deductions.
- It helps you plan smarter: If you know your MAGI in advance, you can choose between Roth and Traditional contributions, adjust your strategies, and avoid surprises at tax time.
A Few Tips for Managing MAGI in Retirement Planning
- Run the numbers before contributing: If your income is near a threshold, check the IRS limits for the year before putting money into a Roth IRA.
- Use workplace plans to your advantage: Contributing to a 401(k) or SEP IRA can reduce your AGI (and MAGI), potentially making you eligible for other retirement accounts.
- Plan ahead if you’re self-employed: SEP contributions can be made up until your tax filing deadline, so you have flexibility to adjust once you know your income.
- Think long-term: Even if you can’t contribute to a Roth IRA now, you might be able to in the future, or you can use conversion strategies when your income dips.
Manage Your MAGI, Simplify Your Savings with PensionBee
MAGI might sound like just another complicated tax term, but when it comes to retirement planning, it acts like a gatekeeper. It determines which types of accounts you’re eligible to contribute to and how much of your contributions can receive tax advantages. Whether you’re maxing out a 401(k), choosing between Roth and Traditional IRAs, or running your own business with a SEP IRA, keeping an eye on this number helps you make the most of your retirement savings.
At PensionBee, we make it easy to bring all your old 401(k)s and IRAs into one transparent account so you can see exactly where you stand and plan your next move with confidence. Most rollovers happen automatically, but if yours needs a little extra attention, our personal rollover managers, called BeeKeepers, are ready to guide you every step of the way. That way, you can focus on growing your savings and planning for the retirement you deserve.
Information contained herein has been obtained from sources considered reliable, but its accuracy and completeness are not guaranteed. It is not intended as the primary basis for financial planning or investment decisions and should not be construed as advice meeting the particular investment needs of any investor. This material has been prepared for information purposes only and is not a solicitation or an offer to buy any security or instrument or to participate in any trading strategy. Past performance is no guarantee of future results.
