IRA Tax Deduction and Credit
Today’s article is going to discuss the tax benefits of contributing to a traditional IRA. Mostly because we’ve touched on this a few times, but have been erroneous/uninformed. Largely due to….you know what, it doesn’t matter. This is how we learn. That is, at least, until we find drugs that can restore and enhance neural plasticity.
That’s probably how the CIA does it. Not saying they have a long history of drug use, but come on…Iran-Contra, anyone? Guns, cocaine, dictatorship, rebels? Oil, Nintendo? Just kidding, let’s get back to the real topic.
The contribution deduction is only available for traditional IRAs. (We’re not getting into 401ks, 403bs, or SEPs. Just IRAs). You get a dollar-for-dollar deduction up to $6,000. Super simple. Even though I just did this yesterday, I can’t remember if you use a schedule 1 to report this, or what it is. Or if you even really need to if it’s the only thing….
Look, you search the IRS website for IRA tax deduction, you’ll find instruction on how to take this deduction. Even though the IRS probably already knows about your retirement account, they’re not giving you a break if you don’t ask for it. Anyway, this is basically an annual discount for your IRA contributions.
Again, Roths can’t take the deduction. Sorry.
You know what Roths can take, though? The Savers credit. ALL RETIREMENT ACCOUNTS are eligible for this credit. Hell yeah. If U-Haul ever offers a retirement account, that will qualify. (You know they sell bonds? I didn’t know that until recently. Obviously, I had to buy one.)
Similar to the deduction, the credit only goes up to the $6,000 contribution limit of traditional and Roth IRAs. However, unlike the deduction, you just get dollars back, up to 50% of your contribution.
Yeah, sorry it’s a little less simple than the deduction. The payoff is better, though. (Deductions lower your taxable income, while credits lower the tax you owe. “Refundable” refers to credits that can take your “tax owed” to below $0 (Resulting in a refund).. Most credits are non-refundable.)).
“But Rocky!”, you say, “Where the heck do I tell the IRS to give me money?”.
Excellent question, friend! Form 8880 will need to be filled and attached to your 1040. I’ll post an informative table, but the short version is, if your AGI is more than $33,000, you can’t take this. Line 11 on form 1040 is your adjustable gross income. At the threshold, you can only take a 10% credit.
Additionally, you cannot take the credit if you contribute less than $2,000 to your IRA. Still, 10% cashback on saving for retirement…why wouldn’t you want that? Or if you’re super poor, like under $20k poor, then you take the full 50%.
You can also take the deduction simultaneously. The deduction gets applied before the credit does, as well. You need a specific amount of low income to realize the full double dip benefit. Also, the math numbers will change if you’re taking distributions…but we’re not going there. The IRS Tax Code is the world’s deepest rabbit-hole. Wikipedia and YouTube can’t even hold a candle to how meta the IRS can get. (Did I use the young people word correctly? F me, I don’t know what’s going on.)
