Reply To: Saver's Credit

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Alan S.

Yes, 2k in contributions as conversions are not new money, so you ignore the conversions. Further, the distribution from the TIRA is not listed as a reduction on line 4 per the 8880 Inst. Conversions therefore do not affect the credit except for their additional AGI which can either reduce the credit tier % or in a positive sense increase taxable income while still in the 50% tier to generate taxes to be offset by the non refundable credit.

In the second case of a 4k distribution, that must be shown on line 4 for the entire testing period of around 3.25 years. This reduction can be offset by making larger contributions than the reductions. So if you make a new contribution of 6k offset by the 4k distribution, you still have a net 2k to generate a savers credit. If you take a larger distribution that must be exceeded, you would probably need to make them to a 401k or similar to have a chance of exceeding the amount of reduction. The punitive part of this is that a distribution from either spouse counts against 3 years of contributions, so there is a large incentive not to take any distributions.

Excess contributions removed by the due date do not count as contributions or reductions.