Saver's Credit

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    Trying to understand how the Saver’s Credit works.

    Suppose you have 12K in TIRA and withdraw 4K to convert to Roth. You also contribute an additional 2K to Roth. Do you just report 2K as contributions on F8880 and ignore the Roth conversion part. The alternative seems to be that you report 6K of contributions and 4K
    of distributions w/ the same net result.

    Suppose you with 4K from TIRA and don’t convert within the 60 days.
    Sometime later you contribute 6K to Roth. Do you now report 6K of
    contributions and 4K of distributions. Is this worse than the first example? There seems to be a 2 yr ? look back period of distributions
    so this punish you more than a conversion?

    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.


    Thanks, Alan. That clarifies things a lot.

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