It depends. According to IRS rules, "recent" distributions include those taken out of retirement accounts during a look-back period, which is designed to discourage people from cashing out their retirement savings while also contributing to such accounts. The look-back period includes:
- The calendar year of the credit (e.g., 2024 for 2024 taxes),
- The two calendar years prior (e.g., 2022 and 2023 for the 2024 Saver’s Credit),
So, even though the 2023 distribution was already accounted for on her 2023 taxes, it will also reduce her Saver’s Credit eligibility for her 2024 taxes because it falls within the two-year look-back window.
The IRS likely implemented this rule to prevent individuals from taking early withdrawals, cashing them out, and then quickly reinvesting the funds solely to claim the Saver's Credit multiple times. However, the rule can indeed feel like a "double penalty" for people like your daughter, who may not have cashed out for such reasons.
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