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Step 1
Identify your gross income. Your gross income is the amount of money you have earned through wages and other forms of earned income identified by the United States government. Other types of income include, but are not limited to, interest, dividends, alimony, capital gains, rental and royalty income, farm income, unemployment compensation and income from certain types of retirement accounts.
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Step 2
Subtract allowable deductions from your gross income to determine your adjusted gross income (AGI). Your AGI is the amount of your gross income, after deductions, that is used to calculate your tax liability. The allowable deductions are numerous and include such things as some business and moving expenses, alimony paid, student loan interest, self-employment taxes and contributions to some types of IRAs.
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Step 3
Check your tax returns for your AGI, since this is usually the most accurate way of finding the correct number. If you filed a standard Form 1040, for example, your AGI is found on line 33 (the last number on the first page). For most traditional IRAs, you will only need to know your AGI, since that is the number with which the tax-deductibility rate of IRA contributions is calculated.
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Step 4
Calculate your modified adjusted gross income (MAGI) for your Roth IRA. While your AGI is determined by subtracting from your income, the MAGI is determined by adding allowable amounts back into your AGI. Allowable items include deductions claimed for student loan interest or qualified tuition and related expenses, employer-paid adoptions expenses, foreign income or foreign housing deductions previously excluded, interest income from EE bonds you couldn't previously exclude and any deductions for regular contributions to a traditional IRA.
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Step 5
Use an interactive IRA tax calculator on financial websites such as Bloomberg to determine which type of IRA would be your best investment based on your AGI (see Resources below).
