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If my annual income plus profits from the sale of a stock is greater than the annual ceiling for being able to contribute to an IRA, am I ineligible to contribute to an IRA?

In other words, are profits from the sale of stocks considered as income when determining my eligibility for contributing to an IRA? Is there any way in which I could sell my stocks but still be able to contribute to an IRA/another tax-deferred account?

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Yes, eligibility for contributing to a Roth IRA is determined by your Modified Adjusted Gross Income (MAGI) which is based on your Adjusted Gross Income (AGI). Now, AGI includes the net capital gains from your transactions and MAGI adds back in things that were subtracted off (e.g. tuition deductions, foreign earned income exclusion) in arriving at the AGI. There is a worksheet in Publication 590 that has the details.

You are always entitled to contribute to a Traditional IRA. The MAGI affects how much of your contribution is tax-deductible on that year's tax return, but not your eligibility to contribute.

Both the above paragraphs assume that you have enough compensation (wages, salary, self-employment income) to contribute to an IRA: the contribution limit is $5500 or total compensation, whichever is smaller. (If you earned only $2K as wages, you can contribute all of it; not just your take-home pay which is what is left after Social Security and Medicare taxes, Federal taxes etc have been withheld from that $2K). If your entire income is from capital gains and stock dividends, you cannot contribute to any kind of IRA at all.

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  • So for purposes of someone with earnings above the limit there is no advantage of a ira over a regular trading account. And it also means there is no way to contribute to roth. Correct? – Sirpingalot Jul 28 '15 at 0:23
  • If you make a non-deductible contribution to an IRA and invest it in stocks, bonds, mutual funds etc, then you can trade within the IRA and defer all taxes on the gains until such time as a distribution is taken. Some think that such a tax deferral is a good deal. Others point out that the distribution is taxed as ordinary income and so all you have done is converted gains on which you could have paid tax at capital gains rates into ordinary income. Take your pick. Re Roth, there is a method called a back-door Roth that can be used. Several answers on money.SE give full details of this. – Dilip Sarwate Jul 28 '15 at 2:06
  • @DilipSarwate While not the focus of the question, Roth contribution eligibility uses the foreign earned income exclusion in two ways. Your excluded income is included in determining if you have exceeded the threshold for being allowed to contribute, but it is excluded when determining how much you can actually contribute. This means there is a narrow income band where you can actually contribute to a Roth IRA if you use the foreign earned income exclusion. – Eric Jul 28 '15 at 20:37
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Yes. Look at form 1040

AGI is line 37, and it comes well after you report your schedule D cap gains.

I read this question as meaning you wish to contribute to a traditional IRA pretax. There is no income limit to contribute to an IRA and not take the deduction.

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  • I did intend for it to be with regards to tax deductions initially :-) – Sirpingalot Jul 28 '15 at 0:22

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