Thursday, February 5, 2015

HOME / ECONOMY & POLICY / The Best Retirement Tax Credit You Never Knew Existed

Eric McWhinnie for writes:  The retirement crisis in America is far from being solved. Workers are increasingly responsible for their own retirement savings, but are faced with a seemingly endless supply of obstacles. Households are experiencing stagnant wage growth, rising living expenses, and an overall sluggish labor market. Making matters worse, millions of people lack financial knowledge and often overlook ways to help them reach their retirement goals.

Benjamin Franklin once said that, “An investment in knowledge pays the best interest.” A large portion of the nation should heed this wisdom and learn about the Internal Revenue Service’s Retirement Savings Contributions Credit, also known as the Saver’s Credit. This overlooked credit is available to low and moderate income workers saving for retirement, but only 24% of Americans with annual household incomes of less than $50,000 are aware of the credit, according to the 15th Annual Transamerica Retirement Survey.
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“The Saver’s Credit is a tax credit that reduces an eligible taxpayer’s federal income tax, making it a meaningful incentive for low- to moderate-income individuals and households to save for retirement in a 401(k), 403(b), or IRA,” said Catherine Collinson, president of nonprofit Transamerica Center for Retirement Studies. “Unfortunately, many eligible workers may be missing out on the Saver’s Credit because they are unaware of it, including workers who have saved in a 401(k) or similar plan in 2014 who may miss it when filing their tax returns. Other workers might have saved had they known about it.”
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Screen Shot 2014-02-06 at 1.22.38 PM
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Source: IRS
The credit reduces a taxpayer’s federal income tax and may be applied to the first $2,000 ($4,000 if married and filing jointly) of voluntary contributions an eligible worker makes to a 401(k), 403(b), or similar employer-sponsored retirement plan, or an individual retirement account. In order to qualify, you must be age 18 or older, not a full-time student, and not be claimed as a dependent on another person’s return. As the chart above shows, the Saver’s Credit is worth a percentage of your contribution, and adjusted gross income limits do apply — the less you make, the greater the percentage. The credit is also a benefit in addition to other advantages, such as tax deductions on retirement accounts.
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Income limits for the Saver’s Credit change over time, so it’s important to check for updated figures on an annual basis. The IRS recently reminded taxpayers about the credit and noted that the income limit will increase to $61,000 in 2015 for married couples, while the limits for heads of households and individuals will rise to $45,750 and $30,500, respectively.
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The IRS provides the following example of the Saver’s Credit: “Jill, who works at a retail store, is married and earned $30,000 in 2014. Jill’s husband was unemployed in 2014 and didn’t have any earnings. Jill contributed $1,000 to her IRA in 2014. After deducting her IRA contribution, the adjusted gross income shown on her joint return is $29,000. Jill may claim a 50% credit, $500, for her $1,000 IRA contribution.” That’s a 50% return for just making the contribution. Workers need to use Form 1040, 1040A, or 1040NR to file their taxes with the credit, which is detailed on Form 8880. Savers have until April 15, 2015 to make a contribution for the 2014 tax year.