Savers Credit

[skives]

Am I understanding the savers credit correctly? If my wife and I each contribute at least $4,000 a year to a 401k and our AGI is $38,000 or below we will get $4,000 off our tax bill? So a refund of $4,000 if we paid in the exact amount due in taxes?

[Like2Plan]

Am I understanding the savers credit correctly? If my wife and I each contribute at least $4,000 a year to a 401k and our AGI is $38,000 or below we will get $4,000 off our tax bill? So a refund of $4,000 if we paid in the exact amount due in taxes?

Yes--that is how I understand it. It is a non-refundable tax credit, so if your tax liability is 4k, you would have a $0 tax bill--and 4k refund. But, if your tax liability was less than zero with this tax credit added in, your refund would still be 4k.

[creditcardfree]

Yes, that is correct, 50% of your contribution, but if your income is above $38,500 the credit is lower a lower percentage and phases out after $62,000 for those filing jointly. IRS has the specifics here.

[skives]

So I know I get this right let me give an example.

Say my wife and I have a 2019 AGI of $38,000 so we pay $4,179 in federal taxes. We also both contribute $4,000 to a Roth IRA. Our tax bill would be $179 for the year so we would get a refund of $4,000 if we had paid in exactly what we owed?

Also is it worth it to chase after this credit. What I mean is based on what I have calculated so far in order for us to get down to $38,500 we would need to switch our 5% Roth 401k contributions to regular 401k contributions and also up it to 9% or 10%. We are already Contributing 10% to a Roth IRA. Based on my calculation we need to add about $2,600 between the two of us above 15% of our income to get the full credit. so we pay $2,600 to get $4,000. Seems like we are ahead by $1,400. Does this make since and is it right?

One last thing is the amount contributed a combination of Roth IRA and Traditional IRA and Traditional 401k or does it have to be all in one? So I would need $4,000 contributed all in one or a combination?

Thanks

[creditcardfree]

So I know I get this right let me give an example.

Say my wife and I have a 2019 AGI of $38,000 so we pay $4,179 in federal taxes. We also both contribute $4,000 to a Roth IRA. Our tax bill would be $179 for the year so we would get a refund of $4,000 if we had paid in exactly what we owed?

Also is it worth it to chase after this credit. What I mean is based on what I have calculated so far in order for us to get down to $38,500 we would need to switch our 5% Roth 401k contributions to regular 401k contributions and also up it to 9% or 10%. We are already Contributing 10% to a Roth IRA. Based on my calculation we need to add about $2,600 between the two of us above 15% of our income to get the full credit. so we pay $2,600 to get $4,000. Seems like we are ahead by $1,400. Does this make since and is it right?

One last thing is the amount contributed a combination of Roth IRA and Traditional IRA and Traditional 401k or does it have to be all in one? So I would need $4,000 contributed all in one or a combination?

Thanks

If your AGI income is $38K, your taxes are not $4,179. Standard deduction for joint filers is $24,000, which makes your taxable income $14K. Taxes would be equal to 10% or $1400.
Here's a chart for 2019 to help you.

Yes, you can combined where you save between the Roth, Traditional or an employee sponsored plan.

The saver's tax is NOT refundable. You cannot get back more than you paid or owe in taxes. It can effectively reduce your liability in taxes to $0.

In your example you would want to save at a minimum $1,400 each to make your tax liability $0. $1400 for you, results in $700 credit. $1,400 for your wife, results in a $700 credit, which brings your federal tax liability to $0. It could be any combination of amounts saved up to $2,800 for the situation you described.

You can save more, of course, you just don't benefit tax wise by saving more. Although I'd recommend saving all money in your Roth IRAs because all earnings on the money you invested and your case paid $0 federal tax dollars is tax free upon withdrawal with you retire.

I'm basing my recommendations on you reporting your AGI is $38K combined income and assuming that doesn't take into account traditional IRA deductions, which effectively reduce income.