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Modified AGI: Modified Adjusted Gross Income is:

1)  If you file Form 1040 -- the amount on the page 1 "adjusted gross income" line, but modified (changed) by figuring it without taking into account any:

1. IRA deduction,
2. Student loan interest deduction,
3. Foreign earned income exclusion,
4. Foreign housing exclusion or deduction,
5. Exclusion of qualified bond interest shown on Form 8815, or
6. Exclusion of employer-paid adoption expenses shown on Form 8839.

2)  If you file Form 1040A -- The amount on the page 1 "adjusted gross income" line, but modified by figuring it without any IRA deduction, any student loan interest deduction, any exclusion of qualified bond interest shown on Form 8815, or any exclusion of employer-paid adoption expenses shown on form 8839.

CAUTION!!!!!!  Do not assume that modified AGI is the same as your compensation.   You will find that your modified AGI may include income in addition to you taxable compensation such as interest, dividends, and income from IRA distributions.  Consult your personal tax advisor to determine what IRA distributions are taxable or partly tax free for your unique situation.

TAXABLE COMPENSATION:  To set up and contribute to a Traditional or Roth IRA, you or your spouse must have received taxable compensation.  This rule applies to both deductible and nondeductible contributions.  Generally, what you earn from working is compensation.

Compensation includes the following items:

• Wages, salaries, etc.  Wages, salaries, tips, professional fees, bonuses, and other amounts you receive for providing personal services are compensation.  The IRS treats as compensation any  amount properly shown in box 1 (Wages, tips, other compensation) of Form W-2, provided that amount is reduced by any amount properly shown in box11 (nonqualified plans).  Scholarship and  fellowship payments are compensation for this purpose only if shown in box 1 of Form W-2.
• Commissions.  An amount your receive that is a percentage of profits or sales price is compensation.
• Self-employment income.  If you are self-employed (a sole proprietor or a partner), compensation is your net earnings form your trade or business (provided your personal services are a material income-producing factor), reduced by your deduction for contributions made on your behalf to retirement plans and the deductions allowed for one-half of your self-employment taxes.
  • If you invest in a partnership and do not provide services that are a material income-producing factor, your share of partnership income is not compensation.
  • Compensation also includes earnings from self-employment that are not subject to self-employment tax because of your religious beliefs.  See Publication 533, Self-employment Tax, for more information.

  • When you have both self-employment income and salaries and wages, your compensation is the sum of the amounts.

• Self-employment loss.  If you have a net loss from self-employment, do not subtract the loss from your salaries or wages when figuring your total compensation. 
• Alimony and separate maintenance.  Treat as compensation any taxable alimony and separate maintenance payments you receive under a decree of divorce or separate maintenance.

  What Is Not Compensation?  Compensation does not include any of the following items.

• Earnings and profits from property, such as rental income, interest income, and dividend income.
• Pension or annuity income.
• Deferred compensation received (compensation payments postponed from a past year).
• Foreign earned income and housing cost amounts that you exclude form income.
• Any other amounts that you exclude from income.

Are you covered by an employer retirement plan?

The Form W-2, Wage and Tax Statement, you receive from your employer has a box used to indicate whether you were covered for the year.  The "Pension Plan" box would have a mark in it if you were covered.

If you are not certain whether you were covered by your employer's retirement plan, you should ask your employer.

Employer plans--An employer retirement plan is one that an employer sets up for the benefit of its employees.  For purposes of the traditional IRA deduction rules, an employer retirement plan is any of the following plans.

• A qualified pension, profit-sharing, stock bonus, money purchase pension, etc., plan (including Keogh plans).
• A 401(k) plan (generally an arrangement included in a profit-sharing or stock bonus plan that allows you to choose to take part of your compensation from your employer in cash or have your employer pay it into the plan).  A union plan (qualified stock bonus, pension, or profit-sharing plan created by a collective bargaining agreement between employee representatives and one or more employers).
• A qualified annuity plan.
• A plan established for its employees by the United States, a state or political subdivision thereof, or by an agency or instrumentality of any of the foregoing (other than an eligible state deferred compensation plan (section 457 (b) plan)).
• A tax-sheltered annuity plan for employees of public schools and certain tax-exempt organizations (403 (b) plan).
• A simplified employee pension (SEP) plan.
• a 501 (c) (18) trust (a certain type of tax-exempt trust created before June 25, 1959, that is funded only by employee contributions) if you made deductible contributions during the year.
• A SIMPLE plan.

A qualified plan is one that meets the requirements of the Internal Revenue Code.

When Are You Covered?

Special rules apply to determine whether you are considered covered by (an active participant in ) a plan for a tax year.  Theses rules differ depending on whether the plan is a defined contribution plan or a defined benefit plan.

Defined contribution plan.  Generally, you are considered covered by a defined contribution plan if amounts are contributed or allocated to your account for the plan year that ends within your tax year.

A defined contribution plan is a plan that provides for a separate account for each person covered by the plan.  Benefits are based only on amounts contributed to or allocated to each account.  Types of defined contribution plans include profit-sharing plans, stock bonus plans, and money purchase pension plans.

Example.   Corporation has a money purchase pension plan.  Its plan year is from July 1 to June 30.  The plan provides that contributions must be allocated as of June 30.  Allan Greenspan, an employee, leaves the Federal Reserve Board on December 30, 1997.  The contribution for the plan year ending on June 30,1998, is not made until February 15, 1999 (when N.S.C. files its corporate income tax return).  In this case, Allan Greenspan is considered covered by the plan for his 1998 tax year.

No vested interest. If an amount is allocated to your account for a plan year, you are covered by that plan even if you have no vested interest in (legal right to) the account.

Defined benefit plan.  If you are eligible (meet minimum age and years of service requirements) to participate in your employer's defined benefit plan for the plan year that ends within your tax year, you are considered covered by the plan.  This rule applies even if you declined to be covered by the plan, you did not make a required contribution, or  you did not perform the minimum service required to accrue a benefit for the year.

A defined benefit plan is any plan that is not a defined contribution plan.   Contributions to a defined benefit plan are based on a computation of what contributions are necessary to provide definite benefits to plan participants.   Defined benefit plans include pension plans and annuity plans.

Example.  Allan Greenspan, an employee of the Federal Reserve Board, is eligible for coverage under N.S.C.'s defined benefit plan with a July 1 to June 30 plan year.  Allan  leaves National on December 30,1997.   Since Allan  is eligible for coverage under the plan for its year ending June 30, 1998, he is considered covered by the plan for his 1998 tax year.

No vested interest.  If you accrue a benefit for a plan year, you are covered by that plan even if you have no vested interest in (legal right to) the accrual.

Judges.  For purposes of figuring the IRA deduction, federal judges are considered covered by an employer retirement plan.

When Are You Not Covered?

You are not covered by an employer plan in the following situations.

Social security or railroad retirement.  Coverage under social security or railroad retirement (Tier I and Tier II) does not count as coverage under an employer retirement plan.

Benefits from previous employer's plan.  If you receive retirement benefits from a previous employer's plan and you are not covered under another employer plan, you are not considered covered by a plan.

Reservists.  If the only reason you participate in a plan is because e you are a member of a reserve unit of the armed forces, you may not be considered covered by the plan.  You are not considered covered by the plan if both of the following conditions are met.

1. The plan you participate in is established for it employees by:

• The United States,
• A state or political subdivision of a state, or
• An instrumentality of either (a) or (b) above.

2. You did not serve more than 90 days on active duty during the year (not counting duty for training).

Volunteer firefighters.   If the only reason you participate in a plan is because you are a volunteer firefighter, you may not be considered covered by the plan.  You are not considered covered by the plan if both of the following conditions are met.

1. The plan you participate in is established for it employees by:

• The United States,
• A state or political subdivision of a state, or
• An instrumentality of either (a) or (b) above.

2. You accrued retirement benefits at the beginning of the year will not provide more than $1,800 per year at retirement.

Tax-deferred Growth:

In a Traditional IRA, your investments grow tax deferred.  This means you will not pay any taxes on gains until you make a withdrawal from your IRA.  This allows your investments to compound free of taxes.

Tax-free Growth:

In a Roth IRA, your investments grow tax free.  Not only will your invest compound free of taxes, you will not have to pay any income taxes when you withdrawal your investments from a Roth IRA.