Contributing to a Roth IRA can earn you a tax credit if you meet eligibility requirements. People who save for retirement with a Roth IRA can fill out form 8880 to determine the amount of the Saver's Credit they are eligible. The purpose of the credit is to encourage people who have lower incomes to save for retirement. There are income limits and other restrictions to earning the credit, however.
Roth vs. Traditional IRA
Contributions to a traditional IRA are tax-deductible. Contributions to a Roth IRA are not. The money you contribute to a Roth IRA isn't taxed when you begin to take distributions, though, while the money in a traditional IRA is taxed. You have to start taking distributions from a traditional IRA by age 70 1/2 but never have to take out money from a Roth. If you pass away, the people who inherit your Roth IRA do not have to pay taxes on distributions either.
Credit vs. Deduction
When you take a tax deduction, you subtract a certain amount of money from your income, potentially lowering the amount of tax you will owe. A tax credit subtracts a certain amount of money from the amount of tax you owe. For example, if you owe $2,000 in taxes and receive a credit of $500, you will only have to pay $1,500. Since a credit directly reduces the tax you owe, it's often a better deal than a deduction.
Who Is Eligible for the Credit
Not everyone is eligible for the Saver's Credit. A single person cannot have a modified adjusted gross income over $27,750, while a married couple who files jointly cannot earn more than $55,500 as of 2011. If you are a full-time student, you cannot claim the credit. You also cannot claim the credit if another person claims you as a dependent. As of 2011, you must have been born after Jan. 2, 1993 to be eligible.
The amount of the tax credit you can receive from Roth IRA contributions depends on how much you contributed during the year and the amount of money you earn. You can earn up to a 50 percent credit on the contribution you make. The maximum contribution you can earn credit for is $2,000, or $4,000 if filing jointly. If you have a low income, your tax credit could be as high as $1,000 per person. The credit amount is reduced the higher your income is but is not lower than 10 percent of your contribution.
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