If you qualify for the Saver's tax credit, can you contribute $5,000 to a Roth IRA for 2009, file your tax return, get the Saver's tax credit, and then take the $5,000 out? I am aware you can take the $5,000 in contributions to a Roth IRA out anytime penalty free, but do you have to pay the Saver's tax credit back?
I believe it has to be in a Roth IRA for 5+ years before it can be withdrawn. Or maybe the account just has to be open for 5+ years, I'm not sure. This is just what I've read at scottrade.
LH2004
Frivolous Member
posted: Nov. 15, 2009 @ 11:11p
FloorsMat said: If you qualify for the Saver's tax credit, can you contribute $5,000 to a Roth IRA for 2009, file your tax return, get the Saver's tax credit, and then take the $5,000 out? I am aware you can take the $5,000 in contributions to a Roth IRA out anytime penalty free, but do you have to pay the Saver's tax credit back?You have to wait until after the due date of the return (including extensions) to make the withdrawal, even if you file early. A withdrawal from an IRA or other retirement plan reduces the amount you are treated as contributing for the year of the distribution, the prior year if it's before April 15 (or the due date including extensions), and the next 2 years. So you can't do this very often, but you can do it once and then again in 3 years.
You don't have to pay it back, but it will affect future eligibility for the Saver's Credit. That's Line 4 on the form. Still, this is a great move for folks that are taking sabbaticals or are going to make one last contribution to their IRA prior to retirement. The Saver's Credit is not refundable but it should wipe out a lot of taxes.
justinv29
New Member
posted: Nov. 15, 2009 @ 11:52p
Also, the maximum contribution you can take the credit on is $2000 for a single filer or $4000 for a married couple, so you really wouldn't want to put any more than that in if you just plan to take it out after you receive the credit.
LH2004 said: FloorsMat said: If you qualify for the Saver's tax credit, can you contribute $5,000 to a Roth IRA for 2009, file your tax return, get the Saver's tax credit, and then take the $5,000 out? I am aware you can take the $5,000 in contributions to a Roth IRA out anytime penalty free, but do you have to pay the Saver's tax credit back?You have to wait until after the due date of the return (including extensions) to make the withdrawal, even if you file early. A withdrawal from an IRA or other retirement plan reduces the amount you are treated as contributing for the year of the distribution, the prior year if it's before April 15 (or the due date including extensions), and the next 2 years. So you can't do this very often, but you can do it once and then again in 3 years.
So does this mean you need to wait until October 15, 2010 to take the Roth contribution back out, even if you don't file for an extension? What are the ramifications if you do not wait??
LH2004
Frivolous Member
posted: Nov. 15, 2009 @ 11:58p
justinv29 said: So does this mean you need to wait until October 15, 2010 to take the Roth contribution back out, even if you don't file for an extension?No -- only if you do file for one. It's whatever date your return would become late, which is normally April 15 unless you file for an extension. What are the ramifications if you do not wait??You would have to amend your return, to include the withdrawal on Form 8880, which will reduce the credit you're entitled to. So, you would have to pay back all or part of the credit you used.
xerty
Senior Member - 2K
posted: Nov. 16, 2009 @ 9:44a
Despite the withdrawal offsetting your contributions when you try to do this again next year, you can still do this to a limited extent due to 2 things:
1) Single you'll only need to put in $4K for the max credit, while the IRA contribution limit is bigger ($5K currently) 2) If you're in the bottom bracket for the max Savers' credit (50% credit under $15K/30K single/married), you won't need the full credit to wipe out all your taxes in most situations
Together these mean that if you're single with under $15K AGI (or married under $30K), your tax liability is likely less than your full Savers' credit. So figure out your taxes close to the filing deadline, find out how much you owe, and the contribute twice that (for the 50% Savers' bracket). This might only be $3K for a single person. Then if you want to do this again next year, you can contribute $5K which counts as $2K net of your $3K withdrawal, but still gets you a decent benefit. The following year you'll be out of luck tho.
The one caveat is for people who have access to tax deferred accounts and can afford to flood those accounts with contributions up to the annual maximum (or the "catch up" maximum of double that for three years near retirement). You could defer just enough money to hit the upper limit of the 50% tax bracket. On the other hand, if you could afford to do that, it might work out better to convert some of the existing tax-deferred money to a Roth instead.
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