Distributions and saver's credit

[JenMO]

My client has been forced to take distributions from a retirement fund from a previous employer. At his new job, he is contributing to the 401K. He is the the 50% savers rate which has usually wiped his income tax liability out, but now with the distributions, it eliminates his credit. He isn't coming out very far ahead by getting his distributions. And he seems to think it is my fault, isn't it always? Is there an exception for this or is he just out of luck.

[rgtaxservice]

Firm but gentle

And he seems to think it is my fault, isn't it always? Is there an exception for this or is he just out of luck.

Sounds like he's out luck...unless he rolled over the distribution. Ask him what he did with the money.

Put the blame where it belongs...squarely on the shoulders of the client. He didn't bother to consult you when it happened despite the notation on many distribution forms regarding 'consult a tax professional'. I never let the client walk any thinking that their misfortunes or mistakes are caused by me.

[BOB W]

I just ran across this also. If you rerun the return with a distribution lower than the contributions made there may be a credit available. I am going to check if that is the case also with my client.

[JenMO]

We did talk about the rollover of some funds to an IRA, and he was wanting to have some extra money so the distributions were available to him. I knew this, but did not think about him putting money into the present employers 401 or whatever it is, too, and then that knocking him out of the saver's credit. He's taking money out of retirement and putting money in, that's why he can't have the credit, correct? Kind of like double-dipping, taking out the money you put in and putting it back in for a tax credit. I need help putting it into perspective for him. Any good phrases for me to use?

[BOB W]

I just checked with my clients return and if the distribution is LESS that the contribution you get the difference for the saver's credit computation.

You can't put money in one pocket and take it out of the other pocket without effecting the saver credit computation. The distribution reduces or eliminates the saver credit if the distribution exceeds the contribution.