Roth IRA Explained

When you contribute funds to a Roth IRA, you probably only expect to get any tax benefits on the other side of the equation, when you’re in retirement. However, did you know that you can get a tax credit for contributing to a Roth IRA? It’s true, you can get a tax credit for contributing to a Roth IRA, or any retirement plan, is you claim the credit and if you satisfy the requirements of the credit. The government wants you to save for your retirement and incentivizes it with these retirement tax credits.

The requirements are:

• You must have turned 18 during the tax year (so the last people who can claim it are those with December 31st birthdays),
• For 5 months out of the year you couldn’t have been a full-time student,
• You aren’t a dependent on someone else’s return,
• And, here’s the big one, your adjusted gross income is less than $26,500 unless you’re married filing jointly (limit is $53,000), head of household ($39,750)) - these figures are for 2007, so come back later in the year once they release the new limits for 2008.

If you qualify, the tax credit lets you get back to 50% of your contribution

How much can you get? You can get a 50% credit if you have adjusted gross income up to $16k ($32k for married filing jointly and $24k for head of household), a 20% credit if you have income up to $34,500 ($28,875 for MFJ and $17,250 for HOH), and only a 10% credit if you’re above those limits but under $26,500 ($53k for MFJ and $39,750 for HOH).

How do you claim it? Fill out Form 8880 and submit it with your 1040 return. This is easy to miss with things like a Roth IRA because it’s not listed anywhere (whereas your 401k usually appears on your tax return).

So, if you qualify, be sure to request it. If you qualified for it in 2007 and never claimed it, be sure to amend your return with a 1040X and get what is rightfully yours!