Government Match for Roth?

[Guest Donna Daniels]

I heard on the Clark Howard (consumer) show that there is a government match available for some Roth IRAs. How can I find out if I am eligible for this government match? Or is there one?

[Michael Devault]

They are likely talking about the new Tax Savers Credit. It's an income tax credit allowed for making contributions to a retirement plan. The amount of the credit is based on your tax filing status and your adjusted gross income.

Complete details can be found in IRS announcement 2001-106, which appears on page 416 of Internal Revenue Bulletin 2001-44. This bulletin is available on the IRS' web site. Hopefully, you can find it at:

http://www.irs.ustreas.gov/pub/irs-irbs/irb01-44.pdf

[mbozek]

Its not really a match, it is a nonrefundable income tax credit of up to lesser of 50% of amount contributed or $1000 for taxpayers with AGIs of less than $50,000 (married) or $25,000 (single) against taxes otherwise owed to the IRS. Non refundable means that the taxpayer will not receive any money back if no income taxes are due. If income tax due is 0 and credit is $1000, taxpayer who contributes $2000 to an IRA will recieve 0 from the government. Credit does not reduce FICA taxes. The credit applies to employee contributions to any type of IRA, 401(k) 403(B), 457 or SIMPLE plan.

[John G]

I seem to recall that this "bonus" is not available to students. It would be just too juicy to give away the bonus to college students. Which raises an interesting question: Just who would fund an IRA on so little income? There just are not many folks who will be in a position to take advantage of this "bonus".

[mbozek]

John: One of the tax strategies advanced by planners is for parents/grandparents to give the amount of the IRA contributions (3000) to working children who can make the contribution and maybe claim the tax credit. It is a great way to make intergenerational transfers to reduce the gross estate and get a tax credit. In addition, the parents/GP can contribute up to $55,000 to a 529 plan to fund college education.

[John G]

Students can not claim the credit... at least that is what I recall and I can't find it now. I looked it up for my kids and seem to see that it is specifically prohibited.

Parents or grandparents funding a working students IRA... or matching contributions.... is a solid idea. It gets them thinking longer term, introduces them to investing and gets them started early. All plusses.

Perhaps someone else has a cite on the "students banned" language.

[MGB]

See the new Code section 25B for the new rules. Subsection © states who is an eligible individual:

Must be 18 (by end of year), regardless of whether or not a student.

After 18:

- May not be claimed as a dependent on another tax return, and

- May not be a "full-time" student.

In addition to mbozek's list of eligible plans and IRAs that the contributions may be for, all qualified plans, not just 401(k) plans, and in particular, contributory defined benefit plans are also included.

However, there is a catch here that applies to all qualified plans, particularly defined benefit. If the contribution is mandatory as a condition of employment, then the tax credit does not apply. Only voluntary contributions are eligible for the tax credit. If a contributory plan allows a person to decline participation, then those that contribute can take the credit.

So, for example, in the many state and local governmental plans that require employee contributions as a condition of employment, these contributions are not eligible for the credit.

John G: Your comment "so little income" does not match reality. Nearly 50% of households in the US are eligible for some level of credit. ($50,000 AGI.)

[John G]

I was thinking more in terms of the 25K for a single person or single parent household... the low end in my town for a school teacher with a BA. Sure there are a large number or percent of these households. But, my point is that when you are below this income level I would imagine it is extremely difficult to set aside 8% of your gross for an IRA. The law provides a nice incentive but from a practical perspective, I would imagine that few eligible households will make use of it. It is certainly a not well publicized, and definitely not commonly known provision among the target group!

[mbozek]

Gross income of 25,000 less standard deduction of 4700, 3000 exemption and 2000 deductible contribution = taxable income of $15,300 and tax of $1995, less credit of 1000 = Net tax of $995. If no IRA contribution is made then fed tax is 25,000-4700 and 3000= 17,300 taxable income and tax is $2295. Making deductible contribution results is a tax savings of $1300 which is equal to 65% of the contribution. (If state income tax is 5% addtional savings is $100). If parent or grandparent gives child $2000 gift to make contribution then child saves $1300 in taxes.

[John G]

Mbozek, if the citation by MGB above is correct (I still have not found it) then your use of the word "child" can be misleading. Not under 18, not a student if over 18 eliminates a large number of folks. Which leaves "adult children", if you excuse the oxymoron. For those who meet all the qualifications, you have done a great job in demonstrating there is a great incentive.

[mbozek]

John: I was referring to your post of a teacher with 25K income. Adults who are not dependents are still children of their parents. I dont know too many students who make 25K a year who can be claimed as a dependent. In any event making a gift of $3000 to a dependent child with $3000 in comp to fund a Roth IRA is still a shrewd economic move.

[John G]

"In any event making a gift of $3000 to a dependent child with $3000 in comp to fund a Roth IRA is still a shrewd economic move. "

Worth of saying in red and repeating. I totally agree.

I teach economics and basic investing as a JA volunteer at the high school level, and devote one hour to Roth IRAs as part of "How really to become a millionaire". Each kid contacts one mutual fund for an IRA starter kit to explore. At the end of the workshop, I suggest that each Senior consider asking a grandparent, uncle, aunt, etc. to help them get started with an Roth IRA and perhaps match their contribution. Over the past three years, there have been about two dozen kids who have come back astonished with the positive responses they got. What a great way welcome a student into the world of adults.