When investing for retirement, there are many tax-advantaged accounts available to help you meet your financial goals. These accounts offer various tax benefits, and can be excellent vehicles for wealth generation and preservation.
While an employer sponsored 401k, and a traditional IRA allow you to deduct your contributions on your taxes, and realize an immediate tax benefit, a Roth IRA works a little differently. In a Roth IRA you pay your ordinary personal income tax rate on your contributions, and then your investments grow tax-free until you withdrawal funds upon retirement.
Because Roth IRAs offer tax-free withdrawals, there is no Roth IRA tax deduction allowed for contributions as with a traditional IRA. Although these contributions are non-deductible, you may be able to utilize a tax credit for as much as 50% of the first $2,000 of your yearly contributions to your Roth IRA.
Roth IRA Tax Deduction: The Roth IRA Tax Credit
If you are eligible to receive it, the amount of credit you receive for contributions to your Roth IRA depends on your adjusted gross income. In order to qualify for the highest percentage tax credit, you must meet the lower income limit. This allows you to claim up to 50% of the first $2,000 contributed to the account.
Based on your income, the tax credit ranges from 10%, 20% and 50%. If your income exceeds the limits for utilizing the 10% Roth IRA tax credit, your income is too high for you to qualify for a tax credit for contributions to your Roth IRA.
If you would like to know if your income qualifies you for a Roth IRA tax deduction you can speak with a qualified retirement specialist at top online broker ETrade, or your personal financial adviser.
Even if your income qualifies you for this tax credit, there are additional eligibility requirements for you to meet.
Roth IRA Tax Deduction: Additional Eligibility Requirements
In addition to income requirements, for you to take advantage of the Roth IRA tax credit you must meet certain other eligibility requirements.
Only new contributions that have been made in the current tax year are eligible for the tax credit. If you have made contributions to a traditional IRA in years past, and you have converted these funds to a Roth IRA, you can not claim them as a Roth IRA tax deduction.
You also must have turned 18 on or before December 31 of the tax year for which you would like to claim the tax credit. If you can be claimed as a dependent on someone else’s tax return, or you were a student for any part of five months during the tax year then you are not eligible for the tax credit for Roth IRA contributions.
Claiming The Roth IRA Tax Credit
It is comparatively easy to claim the Roth IRA tax credit if you qualify. You simply need to submit IRS Form 8880 with your 1040 when filing your tax return. Keep in mind that if you were eligible to claim the Roth IRA tax credit for a prior year and did not, you can still file an amended tax return along with a completed IRS Form 8880.
It is advised that you consult with a professional financial planner, such as the advisers at ETrade, in order to find out if you qualify for the Roth IRA tax credit.
You may also like:
- Are Self-Directed Roth IRA Accounts Right For You?
- IRS Roth Conversion Rules
- How Much Can I Contribute To A Roth IRA?
- Can I Contribute To Both A 401k And A Roth IRA?
- Should You Be Using A Roth IRA As Your Emergency Fund?
- Who Has The Best Roth IRA Accounts?
- Roth IRA Vs Traditional IRA: Which One Is Right For You?
- How Does A Roth IRA Work?