Can I Take Both the IRA Contribution Deduction and the Retirement Savings Credit?
Original post by Herb Kirchhoff of Demand Media
The Internal Revenue Service (IRS) tax rules provide a tax deduction for contributions you make to a traditional individual retirement account (IRA) and certain other retirement plans. The IRS rules also provide another little-known incentive to save for retirement called the Retirement Savings Contribution Credit. This credit is available to qualifying lower-income taxpayers.
Deduction and Credit
If you meet an income test and other qualifications, you can take the Retirement Savings Contribution Credit in addition to the tax deduction for your contributions to your traditional tax-deferred IRA. The credit is also available for tax-deductible contributions you make to other types of tax-deferred retirement savings plans, such as a 401k. If you have a Roth IRA, you don't get a tax deduction for your contributions but you can still get the retirement savings credit. The contributions eligible for the retirement savings credit are reduced by any distributions you received from your IRA. If you contributed $1,000 to your IRA but took a $500 distribution in the same year, you can claim the retirement savings credit on only $500 of your contribution.
If you are single with an adjusted gross income less than $27,750, you can get a retirement savings credit on up to $2,000 of your retirement plan contributions. A married couple filing jointly with combined income below $55,500 can get a retirement savings credit on up to $4,000 in contributions. The credit is in addition to your tax deduction for your IRA contributions. A tax credit is better than a deduction. A deduction reduces your taxable income while a credit directly offsets your tax. If you are in the 20 percent tax bracket, a deduction of $1 reduces your tax bill by 20 cents -- but a tax credit of $1 reduces your tax bill by $1.
If you meet the income qualification, you must also meet three other tests to claim the retirement savings credit. You (and your spouse if married filing jointly) must be over age 18 and must not be a full-time student. IRS rules define a full time student as being enrolled for at least five months out of the calendar year in the number of course hours or number of courses deemed to be full-time study by the educational institution. You also can't be claimed as a dependent by any other person.
The retirement savings credit ranges from 10 percent to 50 percent of your IRA contributions, depending on income. If you're single with an income below $16,750, your credit will equal 50 percent of your IRA contributions, up to the $2,000 contribution cap. That percentage falls to 20 percent of contributions for income between $16,750 and $18,000, and to 10 percent of contributions for income between $18,000 and $27,750. For a married couple filing jointly, the credit will be equal to 50 percent of your combined IRA contributions, up to the $4,000 contribution cap, if your combined income is below $33,500. It falls to 20 percent for combined income between $33,500 and $36,000, and to 10 percent for combined income between $36,000 and $55,500.
- IRS.gov: Publication 590, Chapter 1, Traditional IRAs
- IRS.gov: Publication 590, Chapter 5, Retirement Savings Contribution Credit
- IRS.gov: Form 8880 & Instructions, Credit for Retirement Savings Contribution
About the Author
Herbert Kirchhoff has over 35 years experience as a newspaper and newsletter reporter, writer and editor, with 27 of those years spent on telecommunications industry policy issues. Kirchhoff has a B.A. in journalism from Rider University in New Jersey and has been published in the "Trenton (N.J.) Times" and in "Communications Daily" and State Telephone Regulation Report, Washington, D.C.