Author Topic: Saver's Credit for Older Low AGI Family?  (Read 1240 times)

TFrugal

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Saver's Credit for Older Low AGI Family?
« on: March 20, 2018, 11:16:19 AM »
Quick Question:

There is a MFJ couple both at age 62 with an AGI of $30k.  Neither spouse has contributed to an IRA during 2017. 

Could they contribute $4k for the 2017 year and claim the $2k credit and immediately withdraw the $4k contribution penalty free since over 59.5 and not in same contribution year? Of course it would be taxed as normal income when pulled out.  Anything I am missing?

terran

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Re: Saver's Credit for Older Low AGI Family?
« Reply #1 on: March 20, 2018, 12:00:41 PM »
It looks like the Saver's tax credit looks back 3 years and reduces the amount used to calculate the credit by any distributions taken from retirement plans any time in the 3 years before the year you're filing for and up to the tax filing deadline you're for. mentions that this includes extensions, but I don't know if that means you can't take a distribution until October 15, 2018 because you could file an extension, or if this only applies if you actually file an extension? Maybe someone else can answer that.

For details see the instructions for line 4 of Form 8880. Basically, they're trying to limit the credit for those who have taken recent distributions to the amount they've contributed this year in excess of the amount they've taken as distributions for the last 3 years.

So, your plan would work as long as they leave the contributions in until the tax filing deadline has passed (April 17th, unless it's the extension deadline in which case it would be October 15th). This will mean that you won't be able to do the same next year since this distribution would be counted against any contributions next year. I suppose next year you could contribute $8k and leave it in until next years tax filing deadline.

Something else to note is that the Saver's Tax Credit is nonrefundable, so at most it will erase any federal tax liability (not including self employment tax). With a $30k AGI, 2 personal exemptions (2 x $4050 = $8100) and the standard deduction ($12,700) they're looking at $9200 taxable income, which is just under the top of the 10% bracket, so $920 tax due. So at most they'll get $920 back.

Since they can't get the whole credit back anyway, they should contribute to Roth IRAs since this won't add to next years income if/when withdrawn, and traditional contributions won't reduce their tax any more since the credit will already bring it to $0. They could also limit their contributions to $920 / 50% = $1840 (either one of them or between the two of them).

Make sure you emphasize that this means they only need to come up with $920 of their own money and an additional $920 only until they get their tax refund at which point the government has effectively given them an instant 100% return on their $920 "investment.

If they can afford to leave that money in roth, that is of course ideal since that would let them do the same thing next year. Although, the new standard deduction will mean that $30k AGI would result in only $6k of taxable income, or $600 of tax (so they would want to make $1200 of IRA contributions to get the full credit next year). If they try to keep an emergency fund they might consider keeping it in the roth (perhaps open it at a bank and "invest" it in a savings account or CD). That way they can always withdraw if needed, but if they don't have any emergencies and they're able to leave it they could get the credit next year too.

TFrugal

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Re: Saver's Credit for Older Low AGI Family?
« Reply #2 on: March 20, 2018, 12:19:16 PM »
It looks like the Saver's tax credit looks back 3 years and reduces the amount used to calculate the credit by any distributions taken from retirement plans any time in the 3 years before the year you're filing for and up to the tax filing deadline you're for. mentions that this includes extensions, but I don't know if that means you can't take a distribution until October 15, 2018 because you could file an extension, or if this only applies if you actually file an extension? Maybe someone else can answer that.

For details see the instructions for line 4 of Form 8880. Basically, they're trying to limit the credit for those who have taken recent distributions to the amount they've contributed this year in excess of the amount they've taken as distributions for the last 3 years.

So, your plan would work as long as they leave the contributions in until the tax filing deadline has passed (April 17th, unless it's the extension deadline in which case it would be October 15th). This will mean that you won't be able to do the same next year since this distribution would be counted against any contributions next year. I suppose next year you could contribute $8k and leave it in until next years tax filing deadline.

Something else to note is that the Saver's Tax Credit is nonrefundable, so at most it will erase any federal tax liability (not including self employment tax). With a $30k AGI, 2 personal exemptions (2 x $4050 = $8100) and the standard deduction ($12,700) they're looking at $9200 taxable income, which is just under the top of the 10% bracket, so $920 tax due. So at most they'll get $920 back.

Since they can't get the whole credit back anyway, they should contribute to Roth IRAs since this won't add to next years income if/when withdrawn, and traditional contributions won't reduce their tax any more since the credit will already bring it to $0. They could also limit their contributions to $920 / 50% = $1840 (either one of them or between the two of them).

Make sure you emphasize that this means they only need to come up with $920 of their own money and an additional $920 only until they get their tax refund at which point the government has effectively given them an instant 100% return on their $920 "investment.

If they can afford to leave that money in roth, that is of course ideal since that would let them do the same thing next year. Although, the new standard deduction will mean that $30k AGI would result in only $6k of taxable income, or $600 of tax (so they would want to make $1200 of IRA contributions to get the full credit next year). If they try to keep an emergency fund they might consider keeping it in the roth (perhaps open it at a bank and "invest" it in a savings account or CD). That way they can always withdraw if needed, but if they don't have any emergencies and they're able to leave it they could get the credit next year too.

Awesome response, Terran!  They should be able to go the Roth route and just let it grow each year.  That way they can continue to do this for a little extra "free" money as long as they decide they want to continue to work.

Btw, Zerg is where it's at.

MDM

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Re: Saver's Credit for Older Low AGI Family?
« Reply #3 on: March 20, 2018, 04:45:40 PM »
Quick Question:

There is a MFJ couple both at age 62 with an AGI of $30k.  Neither spouse has contributed to an IRA during 2017. 

Could they contribute $4k for the 2017 year and claim the $2k credit and immediately withdraw the $4k contribution penalty free since over 59.5 and not in same contribution year? Of course it would be taxed as normal income when pulled out.  Anything I am missing?
Can't get $4K credit as already explained.

But one of them could contribute $1535 to a tIRA, dropping tax due from $920 to $0 - and that's saving tax at a 60% rate!  Any more IRA contributions should go to Roth.

In 2018, the same $30K income would incur only $600 tax, so $1000 into the tIRA and the rest to Roth looks best.

This assumes the $30K is eligible for IRA contributions.

terran

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Re: Saver's Credit for Older Low AGI Family?
« Reply #4 on: March 20, 2018, 09:48:41 PM »
Quick Question:

There is a MFJ couple both at age 62 with an AGI of $30k.  Neither spouse has contributed to an IRA during 2017. 

Could they contribute $4k for the 2017 year and claim the $2k credit and immediately withdraw the $4k contribution penalty free since over 59.5 and not in same contribution year? Of course it would be taxed as normal income when pulled out.  Anything I am missing?
Can't get $4K credit as already explained.

But one of them could contribute $1535 to a tIRA, dropping tax due from $920 to $0 - and that's saving tax at a 60% rate!  Any more IRA contributions should go to Roth.

In 2018, the same $30K income would incur only $600 tax, so $1000 into the tIRA and the rest to Roth looks best.

This assumes the $30K is eligible for IRA contributions.

Why put any into tIRA when the savers credit will erase any tax liability at that income level?

MDM

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Re: Saver's Credit for Older Low AGI Family?
« Reply #5 on: March 20, 2018, 09:58:48 PM »
Why put any into tIRA when the savers credit will erase any tax liability at that income level?
You are correct - they are already below the 50% tier - so scratch the traditional recommendation. :)

terran

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Re: Saver's Credit for Older Low AGI Family?
« Reply #6 on: March 20, 2018, 10:22:38 PM »
Why put any into tIRA when the savers credit will erase any tax liability at that income level?
You are correct - they are already below the 50% tier - so scratch the traditional recommendation. :)

Good point, using tIRA to get (just) below the 50% tier can pay off big when you're near the cutoff. After that, Roth all the way since hard (impossible?) to use up the full credit 50% credit since the cutoff puts your tax due below the amount of the full credit.