When calculating Roth IRA contribution limit, is MAGI for previous or current year used?

Question

I was looking into how much I could contribute to a Roth IRA based on MAGI. In 2018, my MAGI was below the amount where contribution limits start to decrease, so I should be able to contribute the maximum amount.

However, it was unclear to me from the IRS docs whether the contribution limit for a year is calculated using the previous year's (already known) MAGI or the current year's (as yet unknown) MAGI.

In a way, it makes sense that you'd use the previous year's MAGI - you know it, so the contribution limit is clear. On the other hand, maybe it is the case that contributions for 2019 are limited by 2019 MAGI, even if you don't know it yet.

If it is the latter, the obvious problem I see is that you don't know your 2019 MAGI until the year is over. So, you could accidentally over-contribute. In that case, would a good strategy be to wait until 2019 MAGI is calculated and make your 2019 contribution before tax day 2020? Or would the safest thing to do simply be to take advantage of the "backdoor Roth IRA" strategy?

I ask because my MAGI for 2018 was close to the limit, and I suspect my 2019 MAGI may be above the limit somewhat. Just want to make sure I don't over-contribute and have to deal with that problem!

Answer 1

The Roth IRA contribution income limit is based on the current year (2019)'s MAGI. If you are not sure whether you will be over the limit or not, you can 1) wait until January 1 - April 15 of 2020 to contribute to Roth IRA for 2019, or 2) do a "backdoor Roth IRA contribution" (assuming you have no money in pre-tax IRAs).

If you have already contributed to your Roth IRA, and later discover that you are over the income limit, you can recharacterize it into a Traditional IRA contribution, and then convert it to Roth IRA again (basically, "belatedly" do a "backdoor"), though you would be taxed on the gain between contribution and conversion when you convert, so it's still better to do a backdoor originally if you think you might be close to the limit, since there is no downside to doing a backdoor if it turns out you don't need it (other than having to fill out an extra form when you do a tax return).