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Originally Posted by 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.
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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.
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Originally Posted by johnnyburger
Say I will owe $2000 dollars in taxes this year.
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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.
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Originally Posted by johnnyburger
I contribute $4000 to a Roth IRA.
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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.
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Originally Posted by johnnyburger
The following year I withdraw my $4000 from my Roth to put down on the house I want to buy, having saved $2000.
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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.