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If any of the fellow fools can help me. I have 2 questions, basically second dependent on the first.
1. Does AGI( Adjusted Gross Income) include-salary + dividendends + short & Long term gains for that particular year ?

2. We file a joint return and our combined AGI ( If I follow the above meaning to include all incomes) is less than 150 K this year and also will be less than 150 K next year. But by year 2001 because of our investments our AGI will be more than 160 K. Unfoolishly, We have never opened any IRA till yet. I was thinking of opening a Roth IRA for myself and the spouse this year, but it seems we may not be able to contribute by the third year( 2001). Should I go with traditional IRA to begin with?

Thanks in advance

Rsyfool
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AGI is line 33 at the bottom of page 1 of Form 1040. Look at the first page of Form 1040 to see all of the things which make up adjusted gross income. Everything you listed plus or minus a bunch more, possibly.

For Roth IRA purposes, the 150K - 160K range is actually on modified AGI. Modified AGI, for IRA purposes, is regular AGI plus student loan interest deduction, excludable EE bond interest, excludable employer provided adoption benefits and certain excludable foreign and U.S. possession income. Also, for Roth IRA purposes, income resulting from converting a traditional IRA to a Roth IRA is not included.

I think you should always contribute to a Roth IRA if you are eligible. All dividends and capital gains inside a Roth are tax-free. It is worth it even if you can contribute only $2,000 for one year. Just find a custodian that doesn't charge a fee for Roth IRAs with low balances.

Once your Roth modified AGI is over the $160,000 limit, you could make nondeductible traditional IRA contributions. These could be converted to a Roth IRA sometime in the future if your modified AGI drops below $100,000 say after early retirement.

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Radonneur, would you know the correct tax treatment for a nondeductible-to-Roth conversion? Part of my Roth conversion was from a non-deductible Roth; the other part was a stock that I subsequently recharacterized after it lost in value.
6 different IRS specialists had just as many differing opinions on how to treat this on form 8606, especially on lines 7 (is the former a rollover?),14b and 15. I have a suspicion of paying much too much tax on my '98 Roth conversions...

The other question is, can a self-employed add to a SEP-IRA in addition to a Money Purchase-Profit sharing Plan, in the same year? Thank you
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would you know the correct tax treatment for a nondeductible-to-Roth conversion? Part of my Roth
conversion was from a non-deductible Roth; the other part was a stock that I subsequently recharacterized after it lost in
value.
6 different IRS specialists had just as many differing opinions on how to treat this on form 8606, especially on lines 7 (is
the former a rollover?),14b and 15. I have a suspicion of paying much too much tax on my '98 Roth conversions...

I'm not sure I fully understand your question. If you are converting a 100% nondeductible IRA to a Roth IRA, you only pay tax on the appreciation. e.g. if you contributed $2000 to a nondeductible IRA in 1997, this is your only IRA, and it was worth $2100 when you converted it to a Roth in 1998, you would pay tax on $100. It gets more complicated with the recharacterization you have. Read the instructions for Form 8606 carefully. Line 7 is only for the amount you received in cash from your nondeductible IRA, not for amounts rolled over or converted to a Roth. Since I don't think you took possession of any cash from your IRA, line 7 should be left blank.

The other question is, can a self-employed add to a SEP-IRA in addition to a Money Purchase-Profit sharing Plan, in the
same year?

Sorry, I am not familiar with the rules for profit sharing plans.
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<<If any of the fellow fools can help me. I have 2 questions, basically second dependent on the first.
1. Does AGI( Adjusted Gross Income) include-salary + dividendends + short & Long term gains for that particular year ?>>

Yup...along with a bunch of other things.

<<2. We file a joint return and our combined AGI ( If I follow the above meaning to include all incomes) is less than 150 K this year and also will be less than 150 K next year. But by year 2001 because of our investments our AGI will be more than 160 K.>>

Congrats....

<< Unfoolishly, We have never opened any IRA till yet. I was thinking of opening a Roth IRA for myself and the spouse this year, but it seems we may not be able to contribute by the third year( 2001).>>

You may be quite right...because of the AGI limitations. But that shouldn't stop you now. Once you qualify for a Roth IRA in any given year, it sticks there...regardless of what happens to your AGI in any subsequent year.

<< Should I go with traditional IRA to begin with?>>

I wouldn't...simply because it's very likely that your traditional IRA would be deemed non-deductible for either or both of you. If your income is above certain limits (about $60k on a joint return), and you are a participant in a qualified pension/profit sharing plan, you'll get no traditional IRA deduction.

So from a tax standpoint, you're even-Steven with a Roth IRA or a non-deductible traditional IRA. But if you look down the line, the Roth IRA will be MUCH more valuable to you in the future.

I have a BUNCH of articles on this issue in the Taxes fAQ area. You might want to check 'em out. Also, in my new book, I've given a lot of time to this very issue.

TMF Taxes
Roy

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