Today we are taking a look at a little discussed tax break called The Saver’s Credit (also known as the retirement savings contribution credit). If you want to boost your retirement savings, you’ll want to take advantage of all the tax breaks you can claim to get there faster, right? Apparently in 2014, 7.9 million people claimed this credit but we don’t hear much about it. If you are early in your career or your earnings are considered “low to modest”, you may catch a break and reduce your taxes by saving for your own retirement.
The Saver’s Credit. What Is It?
The Saver’s Credit, like other tax credits, can increase your tax refund or reduce the amount of tax you owe. It’s been around since 2001. Basically, you get a little extra help, in the way of a tax credit, to save for your own retirement. When you make a qualifying contribution to your retirement savings, you can claim the Saver’s Credit when you file your federal taxes. This benefit is on top of the obvious one – you are doing something proactive for your future retired self. It’s also on top of any employer match you may earn if available at your company and your qualified retirement contributions already reduce your taxable earnings.
That’s pretty awesome. You may be able to earn company match when you contribute to the company’s 401(k), for example and also get a credit of up to $2,000 to reduce the taxes you owe this year.
What is a Qualifying Retirement Contribution?
If you work for an employer with a 401(k), 403(B) plan, 457 or Thrift Savings Plan (for federal employees) and you contribute to these plans, those contributions qualify. However, for these plans you have to make your contributions by the end of the plan year. For example, for 2016 – you had to make these contributions by December 31, 2016. It’s too late for 2016 if you didn’t, but you can plan for 2017!
If you are not eligible for one of these type of retirement plans and you contribute to an Individual Retirement Account (IRA) or the Treasury Department’s myRA , you have until the due date for filing your 2016 return to setup and make a contribution to your account. So you still have time for 2016 if you act before April 18, 2017! Unfortunately, this also means no company match for you this year.
How Much is The Credit?
The Saver’s Credit can provide up to $1,000 for a single person, or $2,000 for a married couple. However, the exact amount is adjusted based on your actual taxable income, your filing status, and is affected by other deductions and credits that you may have.
What Are the Income Limits?
Unfortunately, not everyone can claim this credit.
Who Else Is Disqualified?
The good news/bad news is that if you make over the income limits above, you cannot claim the credit.
There are other rules as well.
• You can’t be a full time student
• You can’t be under the age of 18
• You can’t be claimed as a dependent on someone else’s return
• There are also special rules about retirement plan distributions
So you can’t claim this for your dependent children, even if they are over the age of 18. However, if you have adult children who are expected to launch soon – this may be something you can help them plan for in their early earning years?
This may also be useful to early retires who occasionally have earned income below the income limits and also make retirement contributions. For example, Mr. Need2Save is interested in eventually teaching math and computer science part-time at a community college. The pay is not great, but if he does it and he contributes to a 401(k) or IRA with some of his earnings, we may be able to take advantage of his credit up to $2,000 to keep more of what he does earn.
How Do You Claim The Credit?
If you use tax software, such as TaxAct or TurboTax, it should calculate the credit for you if you report your retirement contributions. Look for a completed Form 8880 in the attachments that your tax software provides. If you do your taxes old-school style, then use IRS Form 8880 to claim the credit.
The Saver’s Credit is not discussed much. We think more people should be aware of it so they can determine if they can save on their taxes. It may help you a bit in your retirement saving goals if your earned income is low enough. It’s just another tool that you can use to reduce your taxes and save more for your retirement. In this case, it’s a credit only for low to moderate income levels.
For those of us in the FIRE community, it may not apply to some of us today – but perhaps tomorrow it will? I can certainly envision future years where our earned income may be below $62,000 for Married Filing Jointly. We know it’s highly likely one or both of our sons may qualify when they are done with school – at least for one year or more.
Have you ever used the Saver’s Credit? Were you able to save the full $1,000 or $2,000?
Is there anyone in your life that you can think of that should look into this further?