Roth contrib/withdrawal effect on Ret Savings Contrib Credit

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Roth contrib/withdrawal effect on Ret Savings Contrib Credit

Post by papito23 » Fri Dec 28, 2012 11:43 pm

I was considering trying to shelter* some home downpayment money (~$10K) in an IRA until 2014+. However, I am concerned that a 2014 withdrawal will affect my ability to utilized the Retirement Savings Contribution Credit (2011 form 8880) in the following years, when I expect to qualify for it again. Considering that the RSCC is pretty lucrative (10-50% instant return), I wanted to get this right.

The 2011 form states that the contributions considered are reduced by:
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 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.


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)
HT: 555

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.
HT: grabiner

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.

Thanks everyone!

*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.
A thing is right when it tends to preserve the integrity, stability, and beauty of the biotic community. It is wrong when it tends otherwise. -Aldo Leopold's Golden Rule of Ecology

Alan S.
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Location: Prescott, AZ

Re: Roth contrib/withdrawal effect on Ret Savings Contrib Cr

Post by Alan S. » Sat Dec 29, 2012 12:13 pm

The "testing period" for withdrawals that result in reduction of your contribution is a little tougher than you indicated in your post.
It includes 1/1 to 4/15 of the year following the year of the intended credit. In your example, that means if your withdrawal in 2014 occurs prior to 4/15/2014, you must show the withdrawal as a reduction on your 2013 8880. It would then affect 2013-2016. If you delay the 2014 distribution till after 4/15, then it won't undo your 2013 credit.

A reduction does not necessarily eliminate the credit, eg a 4,000 withdrawal can be offset by a 6,000 contribution and you would still have the 2,000 net amount which is the max contribution included in the Savers calculation. But the larger the withdrawal the harder it is to benefit from the credit.

The type of IRA contribution (TIRA vrs Roth) you make while eligible for the Savers credit is often different than you would elect without the credit, particularly if you can qualify for the 50% tier. If you need to make a deductible TIRA contribution to get down to the 50% tier, you would typically do that even if a Roth contribution would otherwise be preferable. Sometimes, a split contribution between Roth and TIRA works best, with the TIRA portion limited to just the amount to reduce AGI down to the 50% tier or next higher credit tier to where you otherwise would be.

Married taxpayers can also consider filing separately, as that does not eliminate the credit, and could in some cases result in a larger total credit than filing jointly. Of course, it could cost you for certain other credits.

For a known expense as in your case, saving in taxable may be a better choice if you see continued savers credit years down the road.

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