By Jenny Kiffmeyer, J.D – The Retirement Learning Center
Distributions Affect Saver’s Tax Credit
ERISA consultants at the Retirement Learning Center Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs, qualified retirement plans and other types of retirement savings and income plans, including nonqualified plans, stock options, and Social Security and Medicare. We bring Case of the Week to you to highlight the most relevant topics affecting your business.
A recent call with an advisor in Rhode Island is representative of a common inquiry regarding available tax credits for personal contributions to eligible plans. The advisor asked, “My client wants to claim a Saver’s Tax Credit for 2022 but has taken some distributions in the past. Will those withdrawals affect the amount of credit for which he will qualify?”
Highlights of Discussion
This is a very important tax question for which your client should seek specific tax advice. Generally, yes, the amount of any contribution eligible for the Saver’s Credit is reduced by certain withdrawals taken for the last three years (See IRS Announcement 2001-106, Q&As 4 and 5). For example, for 2022 tax filings, distributions your client (and his spouse, if filing jointly) took after 2019 and before the due date of their 2022 tax return (including extensions) from the following types of plans will lower the credit amount:
- Traditional IRAs,
- Roth IRAs,
- Achieving a Better Life Experience (ABLE) accounts,
- 401(k) plans,
- 403(b) plans,
- Governmental 457(b) plans,
- IRS Sec. 501(c)(18)(D) trusts created before June 25, 1959, to pay pension benefits,
- Qualified plans under IRC Sec. 401(a),
- Qualified annuities under IRC Sec. 403(a),
- Simplified Employee Pension (SEP) IRA plans,
- Savings Incentive Match Plans for Employees (SIMPLE) IRA plans,
- the Federal Thrift Savings Plan (Federal TSP).
However, they should not count distributions:
- That are not taxable as the result of a rollover or a trustee-to-trustee transfer,
- That are taxable as the result of an in-plan rollover to a designated Roth account,
- From an eligible retirement plan (other than a Roth IRA) rolled over or converted to a Roth IRA,
- As loans from a qualified employer plan treated as a distribution,
- Of excess contributions or deferrals (and income allocable to such contributions or deferrals),
- Of contributions made to an IRA during a tax year and returned (with any income allocable to such contributions) on or before the due date (including extensions) for that tax year,
- Of dividends paid on stock held by an employee stock ownership plan,
- From a military retirement plan (other than the Federal TSP) or
- From an inherited IRA by a nonspousal beneficiary.
Your client and his tax advisor can read details of the credit in IRS Form 8880, Credit for Qualified Retirement Savings Contributions instructions and here Saver’s Credit.
Currently, the credit:
- Equals an amount up to 50%, 20% or 10% of eligible taxpayer contributions capped at $2,000 ($4,000 if married filing jointly), depending on adjusted gross income (as reported on Form 1040, 1040SR or 1040N (making the maximum credit $1,000 $2,000 if married filing jointly);
- Relates to contributions taxpayers make to their traditional and/or Roth IRAs, or elective deferrals to a 401(k) or similar workplace retirement plan (other plans qualify so see full list below); and
- Is claimed by a taxpayer on Form 8880, Credit for Qualified Retirement Savings Contributions.
Contributors can claim the Saver’s Credit for personal contributions (including voluntary after-tax contributions) made to:
- A traditional or Roth IRA;
- 401(k),
- SIMPLE IRA,
- SARSEP,
- 403(b),
- Governmental 457(b),
- Federal Thrift Savings Plan,
- ABLE account* or
- Tax-exempt, union pension benefit plan under IRC Sec. 501(c)(18)(D).
In general, the contribution tax credit is available to individuals who:
- Are age 18 or older;
- Not a full-time student;
- Not claimed as a dependent on another person’s return; and
- Has income below a certain level (i.e., for 2022 tax filings, the amount on Form 1040, 1040-SR, or 1040-NR, line 11, is $34,000 or less ($51,000 if head of household, or $68,000 if married filing jointly).
2022 Saver’s Credit Income Levels
| Credit Rate | Married Filing Jointly | Head of Household | All Other Filers* |
|---|---|---|---|
| 50% of your contribution | AGI not more than $41,000 | AGI not more than $30,750 | AGI not more than $20,500 |
| 20% of your contribution | $41,001 – $44,000 | $30,751 – $33,000 | $20,501 – $22,000 |
| 10% of your contribution | $44,001 – $68,000 | $33,001 – $51,000 | $22,001 – $34,000 |
| 0% of your contribution | more than $68,000 | more than $51,000 | more than $34,000 |
*Single, married filing separately, or qualifying widow(er)
The IRS has a handy on-line “interview” that taxpayers may use to determine whether they are eligible for the credit.
Conclusion
Every deduction and tax credit counts these days. Many IRA owners and plan participants may be unaware of the retirement plan-related tax credits for which they may qualify. Seeking qualified tax advice is essential to ensure accurate calculations.
