Retirement Savings Contribution Credit

[scottax]

Considering that the intent of this credit is to encourage savings, it is understandable that most withdrawals from retirement savings during the tax year will reduce that year's contributions and therefore credit. Pub 590 (p 76) does list several exceptions to the penalizing effect of certain distributions. What about the situation where the taxpayer must take an IRA distribution, specifically a required minimum distribution from an inherited IRA? Will this RMD count against the contribution credit?

[Bees Knees]

Any distribution to meet the RMD rules will count against the credit.

A side note, if you are required to take RMD, you no longer can make a traditional IRA contribution.

[scottax]

Thanks BK, but I am referring to a 30 year old who inherits a traditional IRA and must begin minimum distributions according to the IRS on that IRA because the decedent was making RMDs before death. I can't believe that the beneficiary can no longer make IRA contributions nor do I believe that such an RMD (with a distribution code of 4 "death") counts against the retirement savings credit.

[Bees Knees]

I meant that in the context of being required to take RMD from your own IRA, which translates into being age 70 1/2. You are correct; a 30 year old who inherits an IRA and continues to take RMD from that IRA can still make his or her own IRA contributions.

As to whether or not the RMD distributions will count against the savers credit, I see nothing in the code or instructions that says those are exceptions to the rule requiring you to reduce the credit.

[Burke]

Just make sure the 30-yr old does not contribute money into the inherited IRA. It has to be kept separate.

[New York Enrolled Agent]

Just make sure the 30-yr old does not contribute money into the inherited IRA. It has to be kept separate.

It is my understanding that you can NOT contribute funds into an inherited IRA. Based on that belief, I think scottax doesn't need to consider the distribution from that account.

IRC §25B(d)(2) states the rule for the distribution reduction. Since contributions may not be made into the inherited IRA, it appears the code says scottax's RMD is not a problem.

2) Reduction for certain distributions. (caps added)
(A) In general. The qualified retirement savings contributions determined under paragraph (1) shall be reduced (but not below zero) by the aggregate distributions received by the individual during the testing period from any entity of a type to which contributions under paragraph (1) MAY BE MADE. The preceding sentence shall not apply to the portion of any distribution which is not includible in gross income by reason of a trustee-to-trustee transfer or a rollover distribution.

[Bees Knees]

I think you are stretching the meaning of those words just a bit, NYEA.

I can't make contributions into my previous employer's 401(k) anymore, since I no longer work there. Does that mean I can take money out of it and not worry about it counting against my savers credit?

I don't think so...

[Bees Knees]

Oh, and how about this one....

I can't make a contribution to my Roth IRA since I used up my IRA contribution limit on my traditional IRA. Does that mean I can now take a distribution from my Roth IRA and not have it count against my saver's credit?

I don't think so....

[Bees Knees]

The phrase "to which contributions...may be made" is referring to a type of entity (IRA trust account, 401(k) trust account, 403(b) trust account, etc.). An IRA trust account is a type of entity in which contributions may be made. Therefore, anyone who takes a distribution from that type of entity will have his saver's credit reduced. It is not referring to whether the individual taking the distribution can at that moment in time actually make a contribution to that specific IRA account.