Instead of offering tax-deferred savings, like a traditional IRA, the Roth IRA allows people to save after-tax dollars for retirement. If considering a Roth IRA contribution, knowing how it affects your income taxes will help you determine whether it is right for you.
You cannot deduct Roth IRA contributions on your tax return because Roth IRAs are after-tax accounts. Instead of allowing you to claim an income tax deduction for contributions, Roth IRAs permit you to take tax-free distributions when you meet the criteria for a qualified distribution. To take a qualified distribution, you must be at least 59 1/2 years old and your Roth IRA must be at least five tax years old.
Retirement Savings Credit
Your Roth IRA contribution does, however, count as a qualified retirement plan contribution for the Retirement Savings Credit. This credit can reduce your income taxes by up to $1,000 ($2,000 if filing jointly) if you qualify. To qualify, in addition to making the Roth IRA contribution, your adjusted gross income must fall below the annual limits; you must be at least 18 years old; and you cannot have been enrolled as a full-time student for more than five months of the year.
Tax Filing for Retirement Savings Credit
To claim the Retirement Savings Credit, you have to complete Form 8880 when you file your income taxes. The credit ranges from 10 percent to 50 percent of your Roth IRA contribution, depending on your income and filing status. Once you calculate the value of your credit with Form 8880, report the value of your credit on either line 50 of Form 1040 or line 32 of Form 1040A. When you submit your tax return, include Form 8880.
Traditional IRA Alternative
If you want to make your contribution to a retirement plan to get an income tax deduction, consider a traditional IRA contribution. Typically, traditional IRA contributions can be deducted as an adjustment to income, so you can claim the deduction even if you do not itemize. However, you cannot deduct your traditional IRA contribution if you have access to an employer plan, such as a 403b plan, and your modified adjusted gross income exceeds the annual limits for your tax filing status.
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