Most people don't know that if you're saving for retirement on a modest income, the federal government will cut you a break on taxes.
If you’re a company so profitable you store billions of dollars overseas, President Obama wants to hit you hard with new taxes. But if you’re a working-class American trying to save for retirement, Uncle Sam will reward you for putting money out of his reach.
And most people don’t know it. A new study from the nonprofit TransAmerica Center for Retirement Studies found that less than a quarter of Americans with household incomes below $50,000 are aware of the tax credit, even though it has been available since 2002.
To be eligible, you must be 18 or older, not a full-time college student, and not claimed as a tax dependent. Your income must be below $60,000 if your filing status is married filing jointly or $30,000 if single.
If you meet those requirements but haven’t started saving for retirement, keep reading — because you can still make contributions that count for this tax year until April 15. Here’s how it works…
How to qualify
The Saver’s Credit is worth up to $1,000 for individuals or $2,000 for couples, but the amount is based on your income and the amount you contribute to a retirement account. The IRS cautions that most people won’t get that much.
“The saver’s credit helps offset part of the first $2,000 you voluntarily save for your retirement. This includes amounts you contribute to IRAs, 401(k) plans and similar workplace plans,” the IRS says. For couples, it’s the first $4,000. Here are the income thresholds for the credit…
- To get credit for 50 percent of your contribution, your income must be $18,000 or less ($36,000 for joint returns)
- For 20 percent, your income must be $19,500 or less ($39,000 for joint returns)
- For 10 percent, your income must be $30,000 or less ($60,000 for joint returns)
That means for the maximum credit, you’re expected to save 5.5 percent of your income. But even a $100 credit is worth the couple minutes it’ll take to get it.
If you’re using tax software — and if you qualify for this credit, you can get it for free — look for mentions of the “Saver’s Credit” or “Retirement Savings Contributions Credit.” Because tax software usually guides you with questions, make sure you say yes when asked about exploring tax credits or retirement contributions. You don’t want the computer leading you right past that section.
If you’re filing taxes the old-fashioned way, you’re looking for Form 8880, “Credit for Qualified Retirement Savings Contributions.”
How much you can save
The Saver’s Credit is worth up to $2,000 for couples, but that money’s probably not going in your pocket.
There are two types of tax credits — refundable and nonrefundable. This one’s nonrefundable, which means it can lower the taxes you owe (hopefully to $0) but can’t create a tax refund. Depending on your tax situation and the mix of other credits and tax deductions you have, you may still get a refund, especially if you have refundable credits like the Earned Income Tax Credit.
Even if it doesn’t create a refund, a tax credit still does more to keep your taxes down than tax deductions like business expenses or donations to charity. Deductions make your income look smaller, so the savings are only as good as your tax bracket — you only save a percentage of what you deduct.
Credits are subtracted from any tax you owe dollar for dollar. Both are worth their weight in paperwork, but credits are better. Take any you can get.
If you haven’t saved anything for retirement yet and want to get in on this now, you can still set up an IRA (including a MyRA, which requires just $25 to open) on your own and get the credit on contributions you make until April 15.
But the ideal situation is to start making automatic contributions to a company 401(k) plan — because then you get free money from your boss and the federal government, while never missing the difference in your paycheck.