Saving money is tough. There are so many ways in life to spend money and you can easily find excuses for not contributing to a 401k or an IRA. But what if someone gave you money at the end of the year as a “reward” for doing the smart thing and saving for retirement? Would that entice you to begin saving? Enter what’s known as the “Saver’s Credit” to help you do just that!
What is the Saver’s Credit?
The Retirement Savings Contributions Credit (aka the Saver’s Credit) was enacted in 2001 as part of President Bush’s tax cuts, however, many folks are simply not aware it exists. The Saver’s Credit applies to contributions made to qualified retirement plans (401k, 403b, 457) or to a Roth IRA or Traditional IRA. To qualify for the credit, adjusted gross income (AGI) must be below $60,000 for married couples or $30,000 for single filers. The maximum credit available is $1,000 and is a non-refundable credit. For more details check out the IRS website.
A Tax Credit vs. A Tax Deduction
A tax credit is typically more beneficial than a tax deduction, especially for those with income within the required parameters. For example, if you’re in the 15% tax bracket and received a $1,000 tax deduction, the true tax reduction would be about $150 ($1,000 x 15%). A tax credit, on the other hand, is a dollar for dollar reduction of tax liability. For example, if you received the $1,000 maximum “Saver’s Credit” and your total tax liability on the year was $3,000; you would only owe $2,000 in tax.
How do I claim the Saver’s Credit?
If you fit the AGI parameters, you need to complete form 8800. Make sure your tax professional or tax software program is generating this form for you to make sure you are taking advantage of the credit. Many tax software programs that offer free services are for very simple returns (1040EZ), so always be sure that the type of return you are purchasing will, in fact, allow you to take the deductions and credits that are applicable to your situation.
Who can take advantage of this tax credit?
Personally, I see this as a great opportunity for recent college graduates who are entering the work force and have “retirement savings” as number 24 on their “top 25 ways to use my paycheck”. Many are starting off earning an income that falls within the range to take advantage of the credit and are just simply not aware that this incentive exists to save for retirement. This is also a great opportunity for parents or grandparents to consider gifting to the young adult so they can take advantage of the credit if they simply cannot afford to make any type of retirement contribution currently. One stipulation the parent or grandparent may put on the gift is that any added tax refund from the credit needs to be re-deposited into a retirement account. It’s a great way to begin good savings habits that will hopefully last a lifetime!
Need more information on how to put this tax credit to work for you? Please contact me and we’ll take a look at your personal case to see if the Saver’s Credit is an option.
Nick Defenthaler, CFP® is a Certified Financial Planner™ at Center for Financial Planning, Inc. Nick currently assists Center planners and clients, and is a contributor to Money Centered and Center Connections.
This material is being provided for information purposes only and is not a complete description, nor is it a recommendation. Any opinions are those of Center for Financial Planning, Inc. and not necessarily those of Raymond James. The information has been obtained from sources considered to be reliable, but Raymond James does not guarantee that the foregoing material is accurate or complete. Consult a tax professional for any tax matters. C14-023683