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Case Study 1: Factors That Reduce the Eligible ContributionJoe and Mary have been married for five years and always file a joint return. In the previous tax year, Mary changed jobs and cashed in a small 401(k) from her former employer. In the current tax year, both Joe and Mary made eligible contributions to their IRAs and otherwise qualify for the retirement savings credit. They both must reduce the amount of their eligible contributions by the amount of the distribution that Mary received last year. This calculation is completed on Form 8880. Click here for an explanation. Even if taxpayers qualify for the credit, their eligible contributions will be reduced by certain distributions received during the "testing period." The testing period includes:
The types of retirement plan distributions that reduce the eligible contributions include a 401(k) distribution. If either spouse has a distribution during the testing period, both spouses must reduce their eligible contribution by that amount. 
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