We all know how hard it is to find money to save for retirement, but did you know that the government offers a tax credit for participating in your retirement plan? Think of it as an instant reduction to your taxes…what’s not to love?
The Saver’s Tax Credit is designed for those with low to moderate incomes and has the potential to reduce your tax bill by up to $1,000 when you make contributions to your employer sponsored retirement plan. Your tax credit can be as low as 10% or as high as 50% depending on your adjusted gross income and filing status (see the table below). A credit is a dollar for dollar reduction in your tax bill, which makes it even better!
Let’s look at an example. Sue and Joe are married, filing jointly with an Adjusted Gross Income of $38,000. They each contribute $2,000 to their respective employer retirement plans – for a total contribution of $4,000. Looking at the chart below, they would qualify for a 50% tax credit. For them, that means a credit of $2,000 off their tax bill! They each have been able to maximize the allowable credit by contributing $2,000. So, in essence, it only “cost” them $1,000 to to have a $2,000 addition to their accounts.
The Tax Saver’s Credit is applicable to virtually all employer-sponsored retirement plans including 401(k), 403(b), 457(b), Simple, as well as SEP plans. However, there are a few requirements that must be met in order to qualify for the Tax Saver’s Credit. You must be at least 18 years old, not a full-time student, and not claimed as a dependent on someone else’s tax return.
The Tax Saver’s Credit can help those who qualify to BOTH save for retirement and save taxes! A win-win!