Retirement Savings Contribution Credit and DB Pension

[pirsquared]

I am trying to determine whether we qualify for the Saver's Credit (form 8880). My question relates to the section where you subtract any distributions from a retirement plan over the last few years. We have never made any withdrawals from our IRAs or 401Ks. However, DH is drawing a pension (approx. $900/month). This is a traditional defined benefit pension to which he did not and could not contribute. His company did have a separate option to contribute extra to a pension, but that was a separate thing in which he did not participate. The one he is drawing now is not something he did or could contribute to.

I have done some research and it appears that we would not need to subtract the DB pension $, but I am still not completely sure. Here are two bogleheads threads that seem to confirm that DH's pension $ are not subtracted from our contributions:

https://www.bogleheads.org/forum/viewtopic.php?t=185689

https://www.bogleheads.org/forum/viewtopic.php?t=211326

This IRS statement also seems to confirm my thoughts:

https://itap1.for.irs.gov/owda/0/re...s_Redirect_ITA/en-US/help/retcrexcldplan.html

However, this link says differently:

https://www.taxtopics.net/Sec4974c....RA, 401(k) and certain other retirement plans.

None of these links is very recent and I am wondering if anyone here has more recent experience with this issue.

Thanks!

 

[gauss]

I would need to check references to confirm, [-]but yes I believe that DB pension distributions are not included in the Retirement Saver's Credit limits (other than general income amount).[/-]

[edit: pausing my comment above while I research this futher]


Did you check that your overall income will allow this credit? It phases out at fairly low income levels. We don't see many folks who qualify this at our TaxAide site.

-gauss

 

[pirsquared]

I would need to check references to confirm, but yes I believe that DB pension distributions are not included in the Retirement Saver's Credit limits (other than general income amount).

Do you check that your overall income will allow this credit? It phases out at fairly low income levels. We don't see many folks who qualify this at our TaxAide site.

-gauss

When you say "not included" do you mean "not subtracted from contributions"?

Our income will be around $43,000 (under $43,500) after traditional IRA contributions, which would make us eligible. However, this will likely be the only year we will ever be eligible. The pension $ are included in the $43,000.

I am hoping to find out more definitely about the pension, as our potential eligibility for this credit will influence how much/whether we contribute to IRAs this year.

 

[gauss]

Ok, my reference material on this is more complicated than I originally thought.
(I edited my initial response above accordingly).

Will need to research further. Sorry for the confusion

 

[pirsquared]

Ok, my reference material on this is more complicated than I originally thought.
(I edited my initial response above accordingly).

Will need to research further. Sorry for the confusion

If you are willing to research this further, that would be much appreciated! I don't want to take a credit for which we are not eligible, but I would like to take it if we are. The information I have found so far does not seem definitive.

I can see the logic both ways. We can't take distributions and then turn right around and contribute them (churning) and still get the credit. So maybe the fact that we are receiving some retirement $ disqualifies us, or maybe it doesn't since this is not something we did (or even could) contribute to.

 

[pb4uski]

I do this for my son and I don't think the deductions would include any defined benefit pension benefits received.

The deductions are retirement account withdrawals so the credit is calculated on your net contributions to retirement accounts.

Gemini sees to agree:

Are defined benefit pension benefits received a reduction of retirement plan contributions for the Retirement Savers Tax Credit?

No, receiving defined benefit pension benefits does not reduce your eligibility for or the amount of the Retirement Savers Tax Credit.

The Retirement Savers Tax Credit, also known as the Saver's Credit, is based on your contributions to qualified retirement accounts, not on your other sources of retirement income, such as defined benefit pensions. This means that even if you receive a pension, you can still claim the credit as long as you meet the eligibility requirements and make contributions to an eligible retirement plan within the annual limits.

Here are some key things to remember about the Saver's Credit and defined benefit pensions:

• Eligibility: The credit is available to low- and moderate-income taxpayers who contribute to IRAs or employer-sponsored retirement plans, like 401(k)s. There are income limits to qualify for the credit, which are adjusted annually by the IRS. You can find the latest information on the IRS website https://www.irs.gov/retirement-plan...etirement-savings-contributions-savers-credit.
• Contributions: Only contributions made to qualified retirement accounts in a given year are eligible for the credit. This includes contributions made to traditional IRAs, Roth IRAs, employer-sponsored retirement plans like 401(k)s and 403(b)s, and ABLE accounts (if you are the designated beneficiary).
• Defined benefit pensions: Since defined benefit pensions are not considered contributions to qualified retirement accounts, they do not affect your eligibility for the Saver's Credit.

It's important to note that while receiving a defined benefit pension doesn't affect your eligibility for the Saver's Credit, other factors, like your income and filing status, might. For detailed information and eligibility requirements, it's always best to consult the IRS website or a tax professional

 

[gauss]

I am trying to determine whether we qualify for the Saver's Credit (form 8880). My question relates to the section where you subtract any distributions from a retirement plan over the last few years. We have never made any withdrawals from our IRAs or 401Ks. However, DH is drawing a pension (approx. $900/month). This is a traditional defined benefit pension to which he did not and could not contribute. His company did have a separate option to contribute extra to a pension, but that was a separate thing in which he did not participate. The one he is drawing now is not something he did or could contribute to.

Okay - based on your statement above (highlighted) and my reference material (attached below) it appears that you would not need to adjust on line 4 form 8880 the DB pension distribution your husband received.

I'll try to find a better reference for you.

Hopefully one of the other tax experts around here will also weigh in on this.

Regards
-gauss

 

[pirsquared]

I do this for my son and I don't think the deductions would include any defined benefit pension benefits received.

The deductions are retirement account withdrawals so the credit is calculated on your net contributions to retirement accounts for the year.

So if we contribute $8000 ($4000 each) to traditional IRAs for 2023 and DH received $10,000 DB pension in 2023, then we would not need to subtract the $10,000 from the $8000?

 

[pirsquared]

Okay - based on your statement above (highlighted) and my reference material (attached below) it appears that you would not need to adjust on line 4 form 8880 the DB pension distribution your husband received.

I'll try to find a better reference for you.

Hopefully one of the other tax experts around here will also weigh in on this.

Regards
-gauss

The wording "to which the taxpayer (or spouse) could have voluntarily contributed" is helpful. Do you think the "could have voluntarily contributed" replies specifically to the past couple of years timeframe or could not EVER have voluntarily contributed? For us, both apply, but I am interested in the distinction.

 

[pb4uski]

So if we contribute $8000 ($4000 each) to traditional IRAs for 2023 and DH received $10,000 DB pension in 2023, then we would not need to subtract the $10,000 from the $8000?

Yes.

I think you may be overanalyzing and fretting unnecessarily. You have a reasonable basis for taking the credit. If your get audited and it turns out differently (which I don't think it will) at worst you apologize and pay the change in tax and interest.

 

[gauss]

The wording "to which the taxpayer (or spouse) could have voluntarily contributed" is helpful. Do you think the "could have voluntarily contributed" replies specifically to the past couple of years timeframe or could not EVER have voluntarily contributed? For us, both apply, but I am interested in the distinction.

I believe the "testing period" only applies to the last 2 years (see attachment below).

This is from a semi-public reference that you can find on irs.gov (It is designed for participants in the IRS sponsored volunteer tax prep programs -- Publication 4491). I suspect that there is also some type of regulation somewhere that supports the training stated in the 4491 excerpt.

-gauss

 

[38Chevy454]

I think the confusion is pension vs distribution from a retirement account. A pension payment is not a retirement plan distribution as related to the savers credit. The pension payment does add to your income for determining what (if you qualify) amount of benefit you can get for the savers credit. As stated by previous, the income limits are pretty low, and the savings fades out fast even near the top of the income limit. But if you can get even a few hundred $, it certainly seems a good thing to take advantage of.

 

[pirsquared]

I believe the "testing period" only applies to the last 2 years (see attachment below).

This is from a semi-public reference that you can find on irs.gov (It is designed for participants in the IRS sponsored volunteer tax prep programs -- Publication 4491). I suspect that there is also some type of regulation somewhere that supports the training stated in the 4491 excerpt.

-gauss

Thanks! This is very helpful and much more clear than the other information I have found.

 

[pirsquared]

I think the confusion is pension vs distribution from a retirement account. A pension payment is not a retirement plan distribution as related to the savers credit. The pension payment does add to your income for determining what (if you qualify) amount of benefit you can get for the savers credit. As stated by previous, the income limits are pretty low, and the savings fades out fast even near the top of the income limit. But if you can get even a few hundred $, it certainly seems a good thing to take advantage of.

Thanks! This is a good distinction.

Yes.

I think you may be overanalyzing and fretting unnecessarily. You have a reasonable basis for taking the credit. If your get audited and it turns out differently (which I don't think it will) at worst you apologize and pay the change in tax and interest.

Good point. However, if we can't take the credit, we may make different decisions regarding how much to contribute to IRAs as this is a low income year for us. Thus, I want to be reasonably sure before filing (and before making our 2023 IRA contributions).

 

[gauss]

Here is a Q&A on exactly this topic on the Ed Slott irahelp.com forum.
It reviews the legislative history on this and the inconsistencies in the various forms of IRS documentation.

At the end of the day, I believe they agree that DB Pension distributions will not effect the credit (other than the normal inclusion in AGI) if voluntary employee contributions were not allowed. This is OP's case, so I think we are all in agreement that the adjustment is not necessary.

On the other hand, it also suggests that it may be difficult to efile a return with OP's situation in that the tax prep software industry is not asking the proper questions to determine if the adjustment is required or not (ie Were voluntary employee contributions allowed?)

But hey -- that might increase support call center costs to the tax prep software providers so they just deny the credit in many cases. Something to be aware of.

Note several responses above has come to the same conclusion, but they have based their logic on the the fact that DB pension is not a retirement account. The law, however, refers to distributions from qualified retirement plans (not accounts) -- so this is a leap that the cautious should not make IMHO.


-gauss

 

[pirsquared]

Here is a Q&A on exactly this topic on the Ed Slott irahelp.com forum.
It reviews the legislative history on this and the inconsistencies in the various forms of IRS documentation.

At the end of the day, I believe they agree that DB Pension distributions will not effect the credit (other than the normal inclusion in AGI) if voluntary employee contributions were not allowed.

It also suggests that it may be difficult to efile a return with OP's situation in that the tax prep software industry is not asking the proper questions to determine if the adjustment is required or not (ie Were voluntary employee contributions allowed?)

But hey -- that might increase support call center costs to the tax prep software providers so they just deny the credit in many cases. Something to be aware of.

-gauss

Thanks! This is very helpful!

We use Free Fillable forms to e-file. I wonder if it will auto-reject when it detects 1099-R income but no subtraction for same on Form 8880. Or maybe using FFF is more similar to paper filing.

I will also triple-check the pension info. I know there was a pension supplement option that employees could contribute to, but that was a separate thing which DH did not do (some type of "pension plus" program). The actual DB pension he is drawing was not something employees could ever contribute to. In fact, we did not realize it existed until a few years ago. And, of course, none of it could be contributed to during the testing period, as DH left that job in 2020 (was laid off during all the covid layoffs).

 

[gauss]

I used FFF to efile last year. It avoided many problems/bugs that I have had with commercial tax prep software in the past.

I suspect that it will accept your 8880 (and associated credit) without issue.

-gauss

 

[pb4uski]

... Note several responses above has come to the same conclusion, but they have based their logic on the the fact that DB pension is not a retirement account. The law, however, refers to distributions from qualified retirement plans (not accounts) -- so this is a leap that the cautious should not make IMHO.


-gauss

Not totally correct. The logic is the fact that the DB pension was non-contributory, not that the DB pension is not a retirement account. IOW, if the DB pension was contributory, then it would be a different question but the OP was clear that the DB pension was non-contributory and that makes a difference.

 

[pirsquared]

I used FFF to efile last year. It avoided many problems/bugs that I have had with commercial tax prep software in the past.

I suspect that it will accept your 8880 (and associated credit) without issue.

-gauss

I will report back once we have filed. I will probably wait until early April so I can double check everything

 

[pirsquared]

I entered everything into Free Fillable Forms but have not filed yet. When I was entering DH's 1099-R info (for the DB pension), I noticed that there is a box for "Employee Contributions" (Box 5) and it is blank. So at least that proves that he did not contribute anything to the pension.

Also, when I was searching for this thread to reply to it, I noticed that I started an almost identical thread in 2021 with similar results. I completely forgot about that when I started this thread. We did not end up taking the Saver's Credit in 2021 as our income was over the limit (nor did we take it for 2022), so this will be the first year that we actually take the credit.