The 2011 form states that the contributions considered are reduced by:
It appears that this means distributions (such as withdrawal for home down-payment) in year X may negate eligibility for years X, X+1 and X+2. If I make a big withdrawal in 2014, I won't be able to claim the credit in 2014, 2015, or 2016.Certain distributions received after 2008 and before the due date
(including extensions) of your 2011 tax return (see instructions). If
married filing jointly, include both spouses’ amounts in both columns...
[instructions page:]Enter the total amount of distributions you, and your spouse if filing
jointly, received after 2008 and before the due date of your 2011
return (including extensions) ...
It seems this prevents a revolving door of money that snaps up tax credits. Also, it seems to invalidate any strategy of loading/withdrawing one spouse's IRA, then contributing to the other's in years X, X+1, and X+2.
A thankful post-script:
I've learned a couple pretty valuable tax/investing tricks from the Bogleheads, esp. two pertinent for the low/moderate income folks who still manage to save:
1) maximizing Earned Income Tax Credit in the phase-out by using a Trad IRA (aka 34% return for every dollar in T-IRA)
2) bump yourself "down" to the better RSCC level via a Trad IRA. I just found out this trick could have completely erased my $1,516 tax liability in 2008. I'm certain I'll find this helpful in the coming years.
From my reading up until now, Roth IRAs seem to be preferred to T-IRAs in general, and at first blush, for low-earners (I've been paying 0-10% tax now instead of more later). In fact, with the RSCC and EITC thrown in, I don't see the Roth having such an edge, if any.
*The value of tax-sheltering is not great, however, as I expect my Fed tax bracket in 2012 and 2013 to be 0%. Indiana state taxes of ~3%. Plus one other reason for sheltering that is not terribly important.