Tax time is coming, and many of you are considering whether or not to make a 2008 contribution to your Traditional or Roth IRA. I have good news! If you are at least 18 years old, you are not a full-time student, you are not claimed as a dependent on another person’s tax return and you meet the income requirements listed below, you are entitled to a tax credit of up to 50% of your contribution to almost any type of retirement plan, including a Roth IRA! If you then take your refund from the government and put it back into your IRA, your retirement savings will increase by as much as 50%!
Begun in 2002 as a temporary provision, the saver’s credit was made a permanent part of the tax code as part of the Pension Protection Act of 2006. To help preserve the value of the credit, income limits are now adjusted annually to keep pace with inflation. To qualify for the Saver’s Tax Credit, you must have Modified Adjusted Gross Income (MAGI) within the following limits for 2008 and 2009:
|
Filing |
Tax |
Credit is 50% |
Credit is 20% |
Credit is 10% |
No |
|
Status |
Year |
of Contribution |
of Contribution |
of Contribution |
Credit |
|
Married |
2008 |
< $32,000
|
$32,001-$34,500 |
$34,501-$53,000 |
> $53,001
|
|
Filing Jointly |
2009 |
< $33,000
|
$33,001-$36,000 |
$36,001-$55,500 |
> $55,501
|
|
Head of |
2008 |
< $24,000
|
$24,001-$25,875 |
$25,876-$39,750 |
> $39,751
|
|
Household |
2009 |
< $24,750
|
$24,751-$27,000 |
$27,001-$41,625 |
> $41,626
|
|
All Other |
2008 |
< $16,000
|
$16,001-$17,250 |
$17,251-$26,500 |
> $26,501
|
|
Filers |
2009 |
< $16,500
|
$16,501-$18,000 |
$18,001-$27,750 |
> $27,751
|
The maximum tax credit allowed for 2008 is $1,000 (with a $2,000 contribution), or up to $2,000 if married filing jointly and each spouse makes a contribution. Simply attach Form 8880, Credit for Qualified Retirement Savings Contributions, to your income tax return, and you will receive up to a $2,000 tax credit. A tax credit is a dollar for dollar reduction in your tax bill, as opposed to a tax deduction, which only reduces the amount of money on which you pay income taxes. You may get more information on this credit from IRS Publication 590.
To prevent abuse, the IRS has rules which will reduce the amount of contribution which qualifies for the saver’s tax credit if the IRA owner has taken distributions from any eligible employer plan or IRA during a specified testing period. The testing period includes the two taxable years prior to the year the credit is claimed, plus the taxable year the credit is claimed and the following year up until the tax filing deadline for the year the credit is taken, including extensions. For example, if Josh contributes $2,000 to his Roth IRA for 2007 but had previously removed $500 from his IRA in 2006 and removes an additional $500 in 2008 before October 15, only $1,000 of his $2,000 Roth IRA contribution for 2007 may be used toward the saver’s tax credit on his 2007 tax return.
Let me give you an example. Lucky Larry, a married man, was downsized from his job in the corporate world in December, 2006. Larry decided that he wanted to be a real estate investor instead of looking for another j-o-b. Things went fine in 2007, but Larry’s modified adjusted gross income after all of his expenses
will be $30,000 due to his various write-offs, and his taxable income after the standard deduction and 2 exemptions will be $13,500. Therefore his taxes before the tax credit will be $1,353 (see instructions for Form 1040, page 65). He and his wife contribute $1,353 each to a self-directed Roth IRA at Entrust, which they can use to purchase real estate options, debt-leveraged real estate, and many other things. Larry and his wife will receive a tax credit of $1,353 (50% of each of their contributions).
Although the maximum contribution for purposes of the tax credit is $2,000 each, the tax credit is non-refundable. This means that the maximum tax credit Larry and his wife can receive is equal to the taxes they would otherwise pay. With the tax credit, Larry’s income tax for 2007 is ZERO! Larry and his wife wisely decide to contribute the tax refund back into their Entrust self-directed Roth IRAs. Each Roth IRA grows by 50% to $2,029.50 absolutely FREE, courtesy of the United States government!
H. Quincy Long is a Certified IRA Services Professional (CISP) and an attorney. He is also President of Entrust Retirement Services, Inc., with offices in Houston and San Antonio, Texas. He may be reached by email at [email protected] or by visiting the company website at www.EntrustTexas.com. Nothing in this article is intended as tax, legal or investment advice.
© Copyright 2008 H. Quincy Long. All rights reserved.
