Kyle Taylor for the PennyHoarder.com writes: Believe it or not, the government will pay you to save….
I’m serious. Check this out.
It’s called the “Saver’s Credit” and it’s one the most valuable tax credits available, but sadly it’s one of the most overlooked.
If you’re a low or middle income worker, you can take a tax credit if you contribute to a 401k, a Roth IRA, or a traditional IRA. Up to $1,000!
Not only do a lot of people forget about this credit, but tragically too many low-income workers take a pass on the benefits of retirement investing because of the financial strain that they perceive the saving will have on their tight budgets. But, keep reading and I’ll show you how to make saving a little easier…
First, “How do you qualify for the Saver’s Credit?”
Like any tax credit, you need to be able to jump through the qualification hoops to take advantage of the benefits. Obviously, you’ll need to file taxes and save some money in an IRA or employer-sponsored retirement account, like a 401k.
The credit is for mid-to-low income earners and the amount of the credit is determined by your income. The income limits for 2013 are $59,000 for married filing jointly, $44,250 for head of household and $29,500 for single filers. Your income also determines the % of your retirement investment that will be credited to your tax bill (see table below) and the maximum amount of the credit cannot exceed $1,000 for single filers and $2,000 for joint filers.
For example, a single filer earning $17,000 and investing $2,000 in a Roth IRA would receive a credit for 50% of their contributions ($1,000).
Now, “How do I claim the credit”
- First, thing you want to do is open a retirement account (my preference is a ROTH IRA). You can open this with any brokerage firm, but I’m partial to TD Ameritrade, because they will give you up to $600 in free cash when you open an account with them.
- Next, make your deposit. The IRS actually gives taxpayers up until April 15, 2014 to make contributions to IRA accounts and recognize those investments on their 2013 taxes. Pretty cool, huh?
- And lastly, you want to file a FORM 1880 with the IRS. If you’re using a tax service like TurboTax (it’s free this year if you’re just filing your personal tax return!), then it’s even easier to file this form.
Remember: This is a credit, not a deduction.
It is important to note that the benefit that the government is offering is not a deduction, but a credit. On the scale of great tax breaks, tax credits are the most beneficial for taxpayers. That’s because while deductions merely lower how much income you report for taxes, a tax credit is a dollar-for-dollar reduction of the actual tax bill that you pay. So, if you owed $1,000 in taxes, paid $1,000 out of your paycheck all year and your credit is $1,000, you will be getting $1,000 back from the IRS for a tax refund.
Another way to take advantage of the credit (besides a hefty refund check) is to use the credit in a way that the government pays up to 50% of your retirement contribution. If you struggle to come up with the money to open a qualifying retirement account, the Saver’s Credit gives you the opportunity to increase your exemptions on your W2 and lower the taxes you pay out of your paycheck. It’s like getting a pay raise, because you can reduce the amount that comes out of your paycheck for taxes by the amount of the credit you’d receive. Just make sure that the “pay raise” is going into your retirement account and not your bank account or you’ll get a hefty tax bill instead of free money.
How to Make Saving a Little Easier
Now, I know for a lot of us, saving up $1,000 or more can be a little tricky. But consider this: you only need to make an extra $2.74/day throughout the year to save up $1,000. And if you make less than the limits above, the government will chip in the other $1,000.
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