Earn Tax Credits by Saving for Retirement
Did you know that the government incentivizes taxpayers for certain things? It's true. Take, for example, the Retirement Savings Contribution Credit, commonly referred to as the Saver's Credit. This is a tax credit for taxpayers who invest in their future by saving for retirement. It helps reduce your taxes while at the same time helping you and incentivizing you to save for retirement.
How much is the credit?
The credit is up to $1000 (up to $2000, if Married Filing Jointly). While this may not seem like very much, every little bit helps, especially when reducing tax liability.
How does it work?
Based on your Adjusted Gross Income (AGI) and your filing status for taxes, you can receive a credit of 10%, 20%, or 50% of eligible contributions to a 401(k) or to an individual retirement account (IRA). This is a non-refundable credit that will help reduce the amount of taxes due but cannot be more than the amount of taxes owed.
Who qualifies for the credit?
Individuals 18 or older who cannot be claimed as a dependent on another person's return who is not a student and meet income requirements may be eligible for the Saver's Credit.
What are the limits?
As I mentioned, there are income limitations to qualify for the tax credit. The credit is geared towards low to middle-income earners. The limits differ depending on your filing status; see the images below for details for each filing status ( Married Filing Jointly, Head of Household, Single, etc.).
Good and Not So Good News
Good News
The good news is that if you earn somewhat of a low income but tend to have a tax bill when filing your federal taxes, this could really work in your favor. It does two things, it encourages you to establish and contribute to retirement savings, and it also may eliminate or lower your tax burden (you know the money you have to pay). So if you were to file taxes and learn you have a $500 balance and you have a $500 saver's credit, it would reduce your tax bill down to $0. WINNING!
The Not So Good News
While saving for retirement is a great idea and could benefit you, if you earn moderately low income and typically wouldn't owe any taxes, this credit may not actually benefit you. It is a non-refundable credit, meaning if you owe $0 in taxes and receive a $1000 saver's credit, you wouldn't actually get that $1000 as a refund. It can only reduce the taxes you owe.
How much do I need to invest?
Of course, the more you're able to invest, the better in the long run, but you don't have to invest very much to earn this credit (in fact, it's limited with the max contribution to qualify being $1000 or $2000 if married filing jointly). To get the max credit, an individual within the 50% AGI limits could contribute $2000 for a $1000 credit, or a married couple within the 50% AGI limits could contribute $4000 to earn a $2000 non-refundable saver's credit.
If you meet the income limits and are trying to avoid owing taxes, you could contribute enough to get a credit. If you meet the limits for 50% credit, that means if you contribute $1000, you could earn a saver's credit of $500. If you contribute $500, you could earn a $250 saver's credit. These amounts may be doable.
Where to invest?
If available to you, the easiest solution is to invest in a 401(k) or retirement account offered by your employer. If that is not an option, research individual retirement accounts with little or no fees or check with your bank to find out if they have any options.
How do I get the credit?
Typically when you do your taxes especially using tax preparation software, these calculations happen automatically. There's not much for you to do, all you do is enter your information, and if you meet the eligibility requirements, the credit will be calculated for you.
The Bottom Line
I get it. When you're working with a limited budget, retirement savings may be the last thing on your mind. At the same time, there are times when you may receive some extra money that you're just blowing. Think about it, if you are fortunate enough to have some extra cash that you could invest to possibly help you in the future, why not give that a try instead of blowing that money. This is true, especially if you end up owing taxes annually. Saving for retirement could actually keep you from paying out cash to Uncle Sam. And it doesn't have to be much. Everyone should know about the Saver's Credit. If it doesn't apply to you, it may be helpful to someone you know. Share the wealth; knowledge is power!
Note: Tax laws change frequently, and information that is true today may change in the future. Always do your homework to verify the information shared.
Managing Money Like a Boss is about knowing different ways to stretch your dollars, increase your earnings, invest your money, and saving. The Saver's Credit could help do these things if you qualify. 😏