Benjamin Franklin offered one of the best pieces of investment advice that has stood the test of time: “An investment in knowledge pays the best interest.” It’s not enough to simply save money for retirement. You need to learn the various strategies that help you get the most bang for your buck.
Taxpayers looking to heed Franklin’s wisdom should learn about the Internal Revenue Service’s Retirement Savings Contributions Credit, also known as the Saver’s Credit. This overlooked benefit is available to low- and moderate-income workers saving for retirement. 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 (IRA).
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. Since IRAs allow savers to make contributions for the prior year up until tax day, you have until April 18, 2016 to make a contribution for the 2015 tax year.
“The Saver’s Credit is a tax credit above and beyond the advantage of tax-deferred savings when contributing to a 401(k), 403(b), or IRA. Because this double benefit sounds too good to be true, many eligible savers may be actually confusing the two incentives,” says Catherine Collinson, president of nonprofit Transamerica Center for Retirement Studies (TCRS).
Income limits for the Saver’s Credit change over time, so it’s important to check for updated figures on an annual basis. The income limit will increase from $61,000 in 2015 to $61,500 in 2016, for married couples. The income limits for heads of households and individuals will rise to $46,125 and $30,750, respectively.
The IRS provides the following example of the 2015 Saver’s Credit: “Jill, who works at a retail store, is married and earned $35,000 in 2015. Jill’s husband was unemployed in 2015 and didn’t have any earnings. Jill contributed $1,000 to her IRA in 2015. After deducting her IRA contribution, the adjusted gross income shown on her joint return is $34,000. Jill may claim a 50% credit, $500, for her $1,000 IRA contribution.”
In tax year 2012, the most recent year for which complete figures are available, Saver’s Credits totaling $1.2 billion were claimed on more than 6.9 million individual income tax returns, according to the IRS. The TCRS finds only 25% of American workers with annual household incomes of less than $50,000 are aware of the tax credit. Though households eligible for the tax credit may find it difficult or nearly impossible to save for retirement, the responsibility ultimately falls on individuals. Nobody cares about your money and future as much as you do.