Final MLP Unit Bonus and IRA contributions

[djsander]

I retired in 2021. In March of 2022 I received somewhat of a surprise of some prorated MLP units that were part of my compensation plan. Along with that two small checks for deferred payments of the cash distributions. All this had Federal Income Tax, State Income Tax, SS and Medicare with holdings. As I started considering my 2022 taxes I came to the conclusion I should be able to contribute to a traditional IRA and/or a Roth IRA and also our AGI is low enough to claim the retirement savers tax credit. So, I figured when we are doing taxes if our taxes are low enough only go as far as what the savers tax credit will get us in the traditional IRA and the rest of it to the ROTH. Is what I'm thinking reasonable? Comments are much appreciated and I thank all in advance.

 

[SecondCor521]

If you had SS/Medicare withheld, then it is earned income and makes you (and your spouse) eligible for IRA contributions.

Both traditional and Roth IRA contributions qualify for purposes of the retirement savings contribution credit (aka saver's credit). There is a limit of $2,000 per spouse for purposes of the saver's credit. And deductible IRA contributions reduce AGI, which is used along with filing status to determine the saver's credit percentage (50%, 20%, or 10%).

Therefore, what usually makes sense is to do your tax return without the IRA contributions and see what your AGI is, then look at the AGI cutoffs in the table in the middle of Form 8880. Make deductible contributions to your and your spouse's traditional IRAs to get your AGI below the next cutoff, then contribute the remainder of the $2K each to your Roths.

Since the saver's credit is non-refundable, you may find that doing this results in a credit that gets wasted because your tax liability is low enough to where the credit exceeds your tax liability. Now that we're past 12/31/2022, not much you can do about that. If you really didn't want to put that much in your Roths, I suppose you could play around with the Roth contributions until the saver's credit exactly offset your tax liability.

You may want to contribute to your Roth IRA beyond however much is needed to zero out your federal tax liability and perhaps beyond the $2K per spouse saver's credit limitation, of course.

As an aside you may, if you wish, file your tax return with the IRA contributions included as long as you make the IRA contributions by the filing deadline of 4/18/2023. There is no requirement to make the contributions before filing the return. Just make sure you do end up making them so your tax return is accurate.

 

[djsander]

If you had SS/Medicare withheld, then it is earned income and makes you (and your spouse) eligible for IRA contributions.

Both traditional and Roth IRA contributions qualify for purposes of the retirement savings contribution credit (aka saver's credit). There is a limit of $2,000 per spouse for purposes of the saver's credit. And deductible IRA contributions reduce AGI, which is used along with filing status to determine the saver's credit percentage (50%, 20%, or 10%).

Therefore, what usually makes sense is to do your tax return without the IRA contributions and see what your AGI is, then look at the AGI cutoffs in the table in the middle of Form 8880. Make deductible contributions to your and your spouse's traditional IRAs to get your AGI below the next cutoff, then contribute the remainder of the $2K each to your Roths.

Since the saver's credit is non-refundable, you may find that doing this results in a credit that gets wasted because your tax liability is low enough to where the credit exceeds your tax liability. Now that we're past 12/31/2022, not much you can do about that. If you really didn't want to put that much in your Roths, I suppose you could play around with the Roth contributions until the saver's credit exactly offset your tax liability.

You may want to contribute to your Roth IRA beyond however much is needed to zero out your federal tax liability and perhaps beyond the $2K per spouse saver's credit limitation, of course.

As an aside you may, if you wish, file your tax return with the IRA contributions included as long as you make the IRA contributions by the filing deadline of 4/18/2023. There is no requirement to make the contributions before filing the return. Just make sure you do end up making them so your tax return is accurate.

Thanks, you are saying along the lines of what I was thinking. I was planning to do the taxes and then work the contributions to try to get near a zero limit. I didn’t know the Roth contribution was eligible toward the savers limit. That will be the way we go as I don’t believe our tax liability will be too high this year.