2016 Saver's Credit + My Stupidity = No Saver's Credit?

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dudelove22
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2016 Saver's Credit + My Stupidity = No Saver's Credit?

Post by dudelove22 » Mon Mar 20, 2017 3:11 pm

I recently got myself into (possibly) a dumb situation by not being patient and not reading the fine print. Here's the scoop:

2016 financial info:
~ $38K AGI, Married Filing Jointly [all gross income coming from earnings (non-investments)]
No retirement contributions.
Spouse was apparently covered under an employer-sponsored retirement plan (box 13 checked on W2).
I was a full time student (although I was receiving income via an assistantship) and was not covered by an employer-sponsored plan.

I had already filed my 2016 taxes and paid about $1500 in federal taxes. I was browsing this forum and a light bulb went off in my head. I would contribute $3K to a TIRA for myself for the 2016 year (it's before the April 18 deadline), lower our income to below the $37K AGI threshold, and get a tax credit (saver's credit) of 50% of the contributions (i.e., the $1500 I paid in taxes) which in theory would lower my tax bill to $0 for 2016.

To make a long story short, I then read the documentation for the saver's credit and realized that I could not apply this as I was a full-time student for most of 2016. Now I am not sure if I'm 'stuck' with $3K in a TIRA for 2016... So two questions:

1) Can I get the saver's credit if I take the same approach, but deposit the $3K into my spouse's TIRA? Or does her employer-sponsored plan negate this?
2) Can I somehow get back my TIRA contributions? They are not invested yet and I just contributed less than two weeks ago.

Any guidance is much appreciated!

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flamesabers
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Re: 2016 Saver's Credit + My Stupidity = No Saver's Credit?

Post by flamesabers » Mon Mar 20, 2017 3:34 pm

dudelove22 wrote:To make a long story short, I then read the documentation for the saver's credit and realized that I could not apply this as I was a full-time student for most of 2016. Now I am not sure if I'm 'stuck' with $3K in a TIRA for 2016... So two questions:

1) Can I get the saver's credit if I take the same approach, but deposit the $3K into my spouse's TIRA? Or does her employer-sponsored plan negate this?
2) Can I somehow get back my TIRA contributions? They are not invested yet and I just contributed less than two weeks ago.

Any guidance is much appreciated!


1. Yes, you could get the saver's credit if the $3k is put into her TIRA. Her employer-sponsored plan doesn't negate this. In fact, the retirement contribution to receive this credit can be made to an IRA or to an employer-sponsored program. How much did she contribute to her plan for 2016? If it was at least $3k, then you don't need to make the $3k deposit into her TIRA to qualify for this credit.

2. What do you mean? Do you want to convert it to a Roth IRA or pull it out of an IRA entirely?

Since you already filed your 2016 taxes, you'll have to file an amended return to get back your $1.5k you paid earlier.

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Epsilon Delta
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Re: 2016 Saver's Credit + My Stupidity = No Saver's Credit?

Post by Epsilon Delta » Mon Mar 20, 2017 4:10 pm

I have a number of more or less unrelated comments.

First you need to read form 8880 and instructions. If you've already read it, read it again noting the following.

The maximum contribution allowed for each person is $2000, in the 50% tier this is a tax credit of $1000. If both spouses are eligible you can count $2000 contribution each (for a total of $4000 and a $2000 credit). Since you as a full time student don't qualify the maximum credit is $2000 if your wife need contributes at least $2000.

Is your wifes "retirement plan" one of the ones listed on line 2? If so you may already qualify. Your deductible IRA would reduce the joint AGI and her 401(k), 403(b), TSP or 457 could qualify for her $2000 contribution.

You can withdraw your IRA contribution. Ask the custodian for a return of the contributions and any earnings, In most cases the custodian will calculate the earnings. (If this is your first IRA at that custodians the contributions and earnings are the entire account). If you file a return or extension request by April 18 you have until Oct 15 to complete the withdrawal. Any earnings will be taxable and have a 10% penalty (on your 2016 return). The earnings should be minimal if this is in a MM or settlement account so any extra tax will be pennies.

If your wifes work plan does not qualify You need to contribute $2000 to your wife's IRA before April 18. Make sure you designate it for 2016. You may not be able to get any withdrawal completed by then. Hopefully you have an emergency fund to float this for a few weeks.

Also note that your wife only need a $2000 contribution to get the maximum credit. If you want to save $3000 in retirement accounts you could leave $1000 in your IRA and withdraw and contribute $2000 to your wife's. The custodians account minimums could limit what you can do here.

No matter what you do now you need to amend your 2016 return.
If you do nothing you need to either deduct your IRA contribution or add a 8606 to make it non-deductible.
If you withdraw your IRA contribution and earnings you need to add the earnings to your AGI and figure the 10% penalty.
If you contribute to your wifes IRA you need to do report a deductible or non-deductible IRA contribution and claim the credit.

Alan S.
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Re: 2016 Saver's Credit + My Stupidity = No Saver's Credit?

Post by Alan S. » Mon Mar 20, 2017 7:17 pm

Agree with above, except if the 2016 contribution is returned with allocated earnings, the earnings are taxable and subject to penalty on your 2017 return, not your 2016 return. Earnings are taxable IN the year you made the contribution, not FOR the year. You made the contribution in 2017 and so recently there probably would be at most a very small amount of earnings returned if you request the return soon.

Make sure you read the instructions for line 4 of Form 8880 (see link posted earlier). If either spouse took a distribution from one of these plans in 2014 or later, contributions for either spouse must be reduced by the amount of that distribution.

NOTE: A return of a contribution with earnings does NOT count toward line 4.

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Epsilon Delta
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Re: 2016 Saver's Credit + My Stupidity = No Saver's Credit?

Post by Epsilon Delta » Mon Mar 20, 2017 10:08 pm

Alan S. wrote:Earnings are taxable IN the year you made the contribution, not FOR the year. You made the contribution in 2017 and so recently there probably would be at most a very small amount of earnings returned if you request the return soon.

Well, Pub 590A says "in", while 8606 instructions say "for". I'll go with code, which I interpret as '"for" is deemed to be "in"'.

However:
  • What do I know?
  • In this as in most cases the difference is probably too small to matter.
  • If the IRS has anything just a bit clearer than parsing prepositions, I'd go with that.


Pub 590A wrote:Contributions Returned Before Due Date of Return

If you made IRA contributions in 2016, you can withdraw them tax free by the due date of your return.

8606 instructions wrote:Return of IRA Contributions
...
If you made a contribution for 2015 and you had it returned to you in 2016 as described above, don’t report the distribution on your 2016 tax return. Instead, report it on your 2015 original or amended return in the manner described above.


26 USC 219(f)(3) wrote:(3) Time when contributions deemed made

For purposes of this section, a taxpayer shall be deemed to have made a contribution to an individual retirement plan on the last day of the preceding taxable year if the contribution is made on account of such taxable year and is made not later than the time prescribed by law for filing the return for such taxable year (not including extensions thereof).

26 USC 408(o)(3) wrote:(3) Time when contributions made

In determining for which taxable year a designated nondeductible contribution is made, the rule of section 219(f)(3) shall apply.

dudelove22
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Re: 2016 Saver's Credit + My Stupidity = No Saver's Credit?

Post by dudelove22 » Tue Mar 21, 2017 10:49 am

OP again here.

Would the $$$ I contributed towards my TIRA still be deductible (above line) even though I was a student? If so, I am thinking to just leave the $$$ in my 2016 TIRA account and contribute additionally to my wife's TIRA for 2016.

So for example (taking rough numbers here):

Current 2016 AGI (without any contributions): $38K
My 2016 TIRA contribution: $3K
Wife's 2016 TIRA contribution: $5K
Taxable Income: $30K

That means I would pay the following:

Taxes on $30K - Saver's Credit Adjustment (for wife only): $2K * 0.5 = $1K
= Taxes on $30K - $1K

Does this seem right?

jjface
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Re: 2016 Saver's Credit + My Stupidity = No Saver's Credit?

Post by jjface » Tue Mar 21, 2017 10:59 am

dudelove22 wrote:
That means I would pay the following:

Taxes on $30K - Saver's Credit Adjustment (for wife only): $2K * 0.5 = $1K
= Taxes on $30K - $1K

Does this seem right?


Yes assuming taxes are greater than $1k. It is a non refundable credit so you can only reduce your taxes to $0. It might not be worth contributing so much to 2016 tiras - you want to fix it so your tax liability is $1k before the credit. I would have thought it would be under $1k with $30k AGI for a married couple.

dudelove22
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Re: 2016 Saver's Credit + My Stupidity = No Saver's Credit?

Post by dudelove22 » Thu Mar 23, 2017 2:06 pm

OP here. Thanks again everyone for all the responses. It has been extremely helpful and I think my main takeaway has been, make sure to read the fine print when dealing with tax-related issues.

Anyhow, for those who have read the previous comments, I figured out that a total of ~$4500 to my spouse's TIRA would put us at zero federal taxes for 2016.

Now I have another predicament -- is it possible to convert the $3K I contributed in 2016 towards my TIRA to a Roth IRA? How does that work exactly?

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flamesabers
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Re: 2016 Saver's Credit + My Stupidity = No Saver's Credit?

Post by flamesabers » Thu Mar 23, 2017 2:17 pm

dudelove22 wrote:OP here. Thanks again everyone for all the responses. It has been extremely helpful and I think my main takeaway has been, make sure to read the fine print when dealing with tax-related issues.

Anyhow, for those who have read the previous comments, I figured out that a total of ~$4500 to my spouse's TIRA would put us at zero federal taxes for 2016.

Now I have another predicament -- is it possible to convert the $3K I contributed in 2016 towards my TIRA to a Roth IRA? How does that work exactly?


To do the conversion, ask your IRA custodian on what paperwork you'll need to complete. You'll have to pay taxes on the contribution and any earnings when you file your 2017 taxes. Here's a bogleheads wikipedia article on the process:

https://www.bogleheads.org/wiki/Roth_IRA_conversion

jjface
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Re: 2016 Saver's Credit + My Stupidity = No Saver's Credit?

Post by jjface » Thu Mar 23, 2017 3:21 pm

dudelove22 wrote:OP here. Thanks again everyone for all the responses. It has been extremely helpful and I think my main takeaway has been, make sure to read the fine print when dealing with tax-related issues.

Anyhow, for those who have read the previous comments, I figured out that a total of ~$4500 to my spouse's TIRA would put us at zero federal taxes for 2016.

Now I have another predicament -- is it possible to convert the $3K I contributed in 2016 towards my TIRA to a Roth IRA? How does that work exactly?



You can also do a recharacterization - which basically treats the original contribution as having been made to the ROTH in the first place. Just ask whoever you are with to recharacterize the $3k from your TIRA to a ROTH IRA. They will also have to move any related earnings but there is no extra tax on them or anything. Obviously you cannot deduct the $3k TIRA contribution in 2016 since with this it is treated as never happening. Since you made the contribution in 2017 for the 2016 year then all you need to do is to attach a statement to your return to explain what you have done - full details of what to include on this statement are on page 4 of form 8606 (though you do not fill out form 8606!).
eg
I contributed $3,000 to a traditional IRA on May 27 2016; recharacterized $3,000 of that contribution on March 24 2017, by transferring $3,000 plus $300 of related earnings from my traditional IRA to a Roth IRA in a trustee-to-trustee transfer.

You do not need to do a conversion unless you want to take a deduction in 2016 and then have to pay extra taxes in 2017.

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Epsilon Delta
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Re: 2016 Saver's Credit + My Stupidity = No Saver's Credit?

Post by Epsilon Delta » Thu Mar 23, 2017 5:10 pm

dudelove22 wrote:OP here. Thanks again everyone for all the responses. It has been extremely helpful and I think my main takeaway has been, make sure to read the fine print when dealing with tax-related issues.

Anyhow, for those who have read the previous comments, I figured out that a total of ~$4500 to my spouse's TIRA would put us at zero federal taxes for 2016.

Now I have another predicament -- is it possible to convert the $3K I contributed in 2016 towards my TIRA to a Roth IRA? How does that work exactly?


It's not clear, to me, exactly what you are planning.

If for 2016 you want to put $4500 to tIRAs and $3000 to Roths as a couple then for 2016 taxes it doesn't matter how you split that between the two of you. So another option is to leave your $3000 as tIRA and put $3000 to spouse's Roth and another $1500 to either your or your spouse's tIRA.

If your are planning to do a conversion in 2017 then you'll want to consider your 2017 taxes. If your 2017 income will be similar to 2016 a conversion will increase your income and might make it difficult to qualify for the savers credit for 2017. If your 2017 income will be higher (e.g. because you will be working for some or all of the year) you want to plan around that, and that requires an estimate of your 2017 wages, which we don't have.

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