Can I avail savers credit with tIRA conversion

[p_r_s]

Hello All, 

I am asking this question in forum, because I was not able to find anything similar anywhere. 

I am a non US citizen - resident alien and currently thinking not to lock my funds in traditional IRA. 

My current AGI is 73k. If I contribute 6k to traditional IRA for year 2022. It will reduce my AGI to 67k level and make me eligible for Savers Credit of $400 ( considering MFJ).  

And in year 2023, I will convert T-IRA back to ROTH. Then, I will be paying federal tax on 6k converted funds and have a lock in of 5 years.  But I will retain my 400 savers credit as well as save on my IL State Taxes as retirement income is not taxable. 

Is this possible to do so ?   

If yes, I have already contributed 6k to Roth IRA for year 2022. So for now, I will re-characterize it to T-IRA and later move to Roth in 2023. Will that work ? 

Note - As I understand, to get full 400 savers credit, I need to contribute some funds on my spouse's behalf and mostly I will be able to pull it off. 
This is in ref to topic discussed here - 
https://www.bogleheads.org/forum/viewtopic.php?t=276494 
https://ttlc.intuit.com/turbotax-support/en-us/help-article/retirement-benefits/enter-backdoor-roth-... 

Thanks in advance. 

[dmertz]

Yes, this would work.  However, a deductible $6,000 traditional IRA contribution for your spouse alone would be sufficient to get you below the $68,000 AGI threshold to receive 10% credit, so there would be no need to recharacterize your Roth IRA contribution.  Only if your spouse did not make a $6,000 deductible traditional IRA contribution would you need to recharacterize your $6,000 Roth IRA contribution to be a traditional IRA contribution to get below the $68,000 AGI threshold.  By your spouse contributing and you not recharacterizing and converting, your 2023 AGI won't be increased by the amount of that Roth conversion, increasing your chances of qualifying for this credit again in 2023.

[p_r_s]

Thanks @dmertz

I did not understand your point. 

Even if either of us made T-IRA contribution or recharacterization,  in year 2023 - there will be one conversion of 6k from T-IRA to Roth. Correct ? As our goals are common and we do not need money in traditional IRA account.

[dmertz]

If you both make deductible traditional IRA contributions and your desire is to have money in Roth IRAs, you would both have to convert.  You only need one deductible $6,000 contribution for 2022 to reduce your 2022 AGI below $68,000, so unless you have another reason to move an additional $6,000 of income from 2022 to a later year, there is no reason to have two $6,000 deductible traditional IRA contributions for 2022.

[p_r_s]

I understood. 

Sorry, I was not able to explain myself clearly. 

I want to have Savers Credit and avoid State Tax on my t-ira contributions and move money to ROTH. So I am paying Fed taxes on IRA contributions mount. I can understand this might be too much. 

Also I just came to know that, I have around $1000 worth of interest / misc and ordinary dividend income for year 2022. So my AGI will increase by that amount. 

But, what I am trying to do is below - 

1. For spouse - Contribute to 6k to traditional IRA ( deductible) for year 2022.

Now, immediately convert account to ROTH for amount 5000. So it will be a distribution (income added to Federal taxes)  but avoid IL state taxes. 

2. Now, 1k will remain in traditional and reduce my AGI along with my roth -> traditional IRA conversion.  

My Q about point 1 is -> As per my understanding I would get 1099-R in next year i.e 2024 January. 

So is there any way to achieve this ? So I only have 7k in T-IRA and also avoid paying IL state taxes on entire 12k. 

If I would have done this within year 2022 ( before Dec) then I would have got 1099R in Jan 23 and reported in accordingly. 

Sorry for long post. @dmertz appreciate your help.   Thanks. 

[dmertz]

I see.  Because Illinois will exempt the IRA distribution from taxation, it then makes sense to me to make deductible IRA contributions and then convert to Roth.  Contributing directly to Roth would not reduce Illinois taxable income.

[Critter-3]

Just a point ... contributing to any IRA requires that you have enough earned income to do it so this will work if you or your spouse have enough earned income to do it. 

[p_r_s]

yes, we have more than 12k worth of earned income. 

@dmertz  how can I achieve, what you mentioned today morning's post ?  I mean, 2022 year has already passed. So if I contribute 6k to IRA for 2022 and recharacterize, then I will get 1099R in year 2024 jan. 

So I can do above for this year's tax returns. I am stuck. 

I think, I need to do this https://ttlc.intuit.com/turbotax-support/en-us/help-article/retirement-benefits/enter-backdoor-roth-... 
for this year's refund. But I am not sure if I am allowed to do it w/o 1099R 

[dmertz]

I think you said that you already contributed $6,000 to a Roth IRA for 2022, so you would need to recharacterize that to be a $6,000 traditional IRA contribution instead.  The deadline for doing so is April 18, 2023 or, if you file your tax return or request a filing extension by April 18, the extended deadline of October 16, 2023.  You do not need to have the 2023 Form 1099-R to be able to tell TurboTax that you "switched" your contribution from Roth to traditional.

Having made no IRA contribution yet, your spouse could contribute directly to the traditional IRA for 2022 by April 18, 2023.