403b Contributions qualify for Tax Credit too?

[Guest Steph]

The new tax credit for retirement plan contributions -- I have seen that they apply to IRA contributions and 401k's. I wonder if they also apply to 403b salary deferrals.

Thank you for the info!

Stephanie

[Michael Devault]

Absolutely! In addition to contributions to IRAs, the Saver's Tax Credit is applicable for contributions to salary reduction contributions to the following types of plans:

401(k) (including a SIMPLE 401(k))

403(B)

governmental 457

SIMPLE IRA

Salary Reduction SEP

[MGB]

The contributions do not have to be salary reductions, they can also be after-tax contributions. In addition to all of the above named plans (assuming they accept after-tax contributions), contributory defined benefit plans would also qualify.

Note that distributions from any type of plan within the prior two years or during the period following the contribution, but before the filing of the tax return, will reduce the contribution used in determining the credit.

Also, this is a nonrefundable credit. That means you must have a tax liability to be able to use it to offset. For very low income workers without a tax liability, the tax credit is useless. If a person is subject to the alternative minimum tax (e.g., high salary with large offsets for other losses), the credit cannot reduce taxes below the alternative minimum tax due.

[Guest Steph]

Thank you!

So that I am clear -- nonrefundable credit means that on line 42 you owe tax. You can still get a refund of dollars you have already had withheld or paid through estimated taxes.

Again -- thank you!

Stephanie

[MGB]

I don't have a 1040 here, but if line 42 is the total tax (before recognizing withholding and tax credits), then you have it right.

Example:

Total tax before withholding and credits = $2,000

Withholding = $2,500

Tax credit = $1,000

You would get $1,500 tax refund.

This is where "nonrefundable" comes in:

Total tax before withholding and credits = $500

Withholding = $700

Tax credit = $1,000

You would get only a $700 refund. The credit cannot reduce the tax owed to less than $0. (If this were a "refundable" credit like the Earned Income Credit, then you would get a $1,200 refund.)