Potential IRA/Savers Credit Scheme

[johnnyburger]

I've thought up this scheme that I'm almost sure will work, but I'm curious if anyone who has more experience with this stuff can find any problems with it.
It goes like this:

Say I will owe $2000 dollars in taxes this year.
I contribute $4000 to a Roth IRA.
I claim the Savers Credit, which is good for 50% of my contribution because my AGI is under $35,000.
My $2000 tax credit eliminates my tax liability for the year.
The following year I withdraw my $4000 from my Roth to put down on the house I want to buy, having saved $2000.

Any issues that anyone can see?
By the way, I'm not looking for anyone to convince me that leaving my $4000 in my Roth is a better idea than putting it towards a house.
Any help is appreciated. Thanks.

 

[jebmke]

If I were you I'd work through the full calculations on Form 8880. I don't think your math works.

 

[johnnyburger]

Will do. Thanks for the suggestion.

 

[kaneohe]

Filing status? If MFJ, your tax may be less than 2K? so your credit may be less. Might work the first yr but subsequent yrs track retirement withdrawals so would be more difficult to do in future yrs.

 

[johnnyburger]

jebmke, you were definitely right on. The way the credit is calculated is a little more complicated than I had thought. Looks like there is a credit limit based on one's tax liability as well. I think working through the entire form will be the best way to figure this out.
kaneohe, you're right in saying that it would be more difficult in subsequent years. I'm just looking at this as a one time thing.

 

[karluk]

I've thought up this scheme that I'm almost sure will work, but I'm curious if anyone who has more experience with this stuff can find any problems with it.

I have always been above the income limits for claiming the retirement savings credit, but I worked through form 8880 looking for pitfalls. It appears to me that your scheme will work, but that you probably won't realize a full $2,000 in tax savings and may have to wait longer to withdraw your Roth contributions than you perhaps are expecting.

Say I will owe $2000 dollars in taxes this year.

I don't see any clear way for you to actually owe $2,000 in taxes that is compatible with being eligible for a 50% retirement savings credit. You say that your AGI is "under $35,000". If your AGI is close to $35,000, you would only be eligible for a 50% credit if your filing status is married filing jointly. Using the 2013 tax forms, you would have a standard deduction of $12,200 and two personal exemptions for you and your spouse of $3,900 each. That would take your taxable income down from around $35,000 to around $15,000. According to the tax tables, you would owe only about $1,500 in taxes. That would be the limit of your tax savings, since the credit is not refundable.

I contribute $4000 to a Roth IRA.

You would actually have to open up two Roth IRAs - one for yourself and one for your spouse and contributed $2,000 to each. Line 6 of form 8880 imposes a $2,000 limit per person on the amount of your IRA contribution that is eligible for the credit.

The following year I withdraw my $4000 from my Roth to put down on the house I want to buy, having saved $2000.

When exactly in the following year are you planning on making the withdrawal? Line 4 of form 8880 requires you to subtract all of the distributions from your Roth IRA "received after 2010 and before the due date of your 2013 return (including extensions)" I believe the due date (with extensions) is typically October 15 of the following year. So you could have done this for your 2013 taxes, but still have to wait until the middle of October, 2014, to withdraw your money.