Now that I have found you $1,200… Your turn to find me $1,200!

Thank you SO MUCH for the help! This will save me (or rather, earn me) almost $1200!

You can undo the conversion! This would lower your taxable income for the year as well as save you on the taxable income since I am sure the value has gone down.

http://finance.yahoo.com/focus-retirement/article/105556/Undoing-a-Roth-Conversion?mod=retirement-IRA

I knew my income would be very low this year, so I took the opportunity to convert a small ($3,000) traditional IRA to a Roth. This gave me a big tax advantage, but it also raised my income for the year from $15k to $18k.

This means my credit for my 401(k) contributions plummets from $1000 to $200, meaning taking care of my retirement actually hurt me in taking care of my retirement!

This is a VERY awkward stepdown. You mean to tell me that a single person with an AGI of $16,000 gets a $1000 credit, but a person with an AGI of $16,001 gets only $400?

@Dana: The saver’s credit is based on your Adjusted Gross Income (AGI), not taxable income. This makes it a bit harder to qualify.

Mike, you’re right about the $500 increase.

That is not a draft of the 2008 form. That is simply 2007′s form. Although, I can’t imagine much will change other than the Table on Line 9 to show the $500 increase.

So for every dollar you put into a 401K, not only are you saving that dollar from being taxed in the present (it will be taxed when you withdraw it in the future), but you are ALSO getting anywhere from an additional 10 cents to 50 cents off your tax bill. The IRS is basically paying you to save.

Granted the income limits are pretty stiff for the tax credit, but you can still defer tax payments by contributing to a 401K – the income limits on this are MUCH higher if they exist at all.

In Canada, you can defer the income tax on contributions to a registered retirement savings plan (RRSP). Your annual contribution limit is 18% of your previous year’s income, up to a maximum of $20,000 for 2008 ($21k for 2009, $22k for 2010, etc. – it increases with inflation). There is no maximum income cutoff after which you’re not eligible for this credit. If you earned $100,000, then you can stash $20,000 of it in an RRSP and get back the income tax you paid on that $20,000. That’s not a trivial amount!

The one drawback is that if you have a company pension, then they reduce how much you’re allowed to invest in your RRSP. But if, like my wife and I, you have no company pension at all, then you’re allowed the maximum each year. We have a combined RRSP contribution limit of $40,000 this year. If we were to take full advantage of that, we’d get an income tax refund of over $15,000. That’s a great start to the next year’s RRSP contribution. And unused contribution room carries forward indefinitely.

The drawback is, once you retire and start withdrawing from your RRSP, your withdrawals are taxed as regular income, rather than the preferred taxation treatment afforded to dividend or capital gains income. However, after you retire, your income will be lower anyway, and you’ll be in a lower tax bracket.

Even better, starting next year, our government is phasing in another savings program called the Tax Free Savings Account (TFSA), which is basically like a Super-Roth-IRA. Individuals are allowed to contribute $5,000/year (regardless of income, and also indexed for inflation over time). It’s not tax-deductible, but it is allowed to grow tax-free. However, unlike a Roth IRA, you can withdraw your money at any time, with no penalty at all. Even better, if you take money out, you get that contribution room back! So if I contribute $5,000 this year, then next year I’m allowed to contribute $5,000 more. However, if I take out my original $5,000, I’m now allowed to contribute $10,000. You get the room back. It’s actually pretty sweet.

On the other hand, you can’t deduct mortgage interest in Canada. Still, I think our retirement programs are far superior to those of the US. Maybe if people had more incentive to save, and people were more used to living below their means, this whole credit fiasco could’ve been avoided? Bah, who am I kidding.

I almost feel we’re given too many incentives in Canada. If my wife and I wanted to max out our RRSPs ($20,000 each) and our TFSAs ($5,000 each), we’d need $50,000! I consider us pretty aggressive savers, but we can still only manage about $30,000 or so this year. Fortunately, the unused room carries forward to next year, so we get another chance to try and max that out.

It all depends on your AGI (take a look at last years 1040 on line 38 (or 1040A, line 22 or 1040NR, line 36). If you were under $26k last year, you likely qualified for this credit and will likely qualify again in 2008. Due to your income being at the top of the threshold, you will probably only be able to take a $200 max credit for this (this is due to the phase out I commented on earlier).

$200 is still $200. You may want to take a look at your 2007 return to see if you qualify. It may be beneficial to file an amended return to get your credit for 2007.

Too bad the phase out is so low! In 2007, $15.5k for Single & $31k for MFJ. I doubt too many people making less than $26.5k have too much left over to sock into their retirement savings with the way the prices of everything has been going up.

I did qualify last year only because I was job searching for the first half of the year. Saved me $790 on my tax bill.

It is a great credit if you qualify and have the wherewithal to contribute to your retirement savings!