Funding Retirement Account & Savers Credit
Hi, can someone receiving ACA subsidies due to low wages, open and contribute to a Roth IRA without a reduction or loss of ACA subsidies?
Would being eligible and taking the ‘savers credit’ on income taxes impact their ACA subsidies?
Answer
Funding a 401(k) lowers MAGI, but funding a Roth IRA doesn't due to how it's taxed. Anything that affects MAGI can affect ObamaCare's tax credit amounts.
The "savers credit" is based on MAGI and those savings come off after MAGI is calculated. This means that it won't affect your tax credit, but can affect that actual amount you owe in taxes.
The rule of thumb with all of this stuff is that if something lowers your AGI/MAGI it most likely qualifies you for more assistance (or in worst cases can bar you from assistance programs if MAGI goes to low). This is true for ObamaCare's premium tax credits. If your MAGI (after funding a traditional 401k, HSAs, and the like) is lower you can claim a larger premium tax credit on form 8962 and/or avoid paying back previously claimed advanced tax credits.
Regular IRA contributions are deducted from AGI the year contributed, and included in AGI the year it’s taken out. Roth IRA's are counted the year they are contributed, and not counted on the way out.
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“You wrote that things that get a tax break on the way out, like an IRA don’t have this affect at the time of funding (that income is deducted from MAGI when it is taken out later).” I think your statement is completely backwards. Regular IRA contributions are deducted from AGI the year contributed, and included in AGI the year it’s taken out.
100% right. Maybe I was talking about a Roth, maybe it was a brain-flub. Anyway, it is correct now. Thank you for the edit!
If you make 401k contributions and Traditional IRA contributions, can both be taken out?
I don’t fully understand the question. However, the rule of thumb is any taxable withdrawal counts as income and would thus affect tax credits by increasing your taxable income and any contribution that reduces your AGI lowers your MAGI and thus would affect tax credits by lowering your taxable income.
IRA and 401k thus both have different implications, and they also have contribution rules that can conflict.