The Retirement Saver’s Credit
I often repeat one of the best pieces of advice I ever received from my father: “If it sounds too good to be true, it usually is.” Therefore, it should not be surprising to you that the first time I heard of the advantages of the Retirement Saver’s Credit, I was skeptical. And while income limitations make this credit unavailable to many, millions of people could benefit from this tax credit—but do not.
What is the Retirement Savers Credit?
The Retirement Savers Credit is a tax incentive to save for retirement. In exchange for you putting money in a qualified retirement account such as a 401(k), IRA, Roth IRA, or 403(b), the government reduces your taxes. You might already know that the government allows an immediate deduction for contributions to many retirement plans—separate from this credit. For example, every dollar you put in your 401(k) plan may reduce your taxable income, immediately saving you taxes. One would think that would be enough of an incentive to save; and it is, for many.
Yet, possibly disappointed by how little most taxpayers save for their futures, the government created an additional incentive–the Retirement Savers Credit. What’s more, the credit is in addition to (not instead of) all the other existing tax incentives to save.
How Does the Credit Work?
Depending on your income level, a certain percentage of the amount you save for retirement is eligible for a credit. The maximum savers credit may be as much as $1,000 ($2,000 for married couples).
Who Qualifies for the Credit?
Only those who save for retirement qualify for the credit. Married savers filing jointly with an Adjusted Gross Income (AGI) below $56,500 qualify for the credit, as do Heads of Households with an AGI less than $42,375 and singles with an AGI less than $28,250.
What is the Credit Worth?
Unlike tax deductions which reduce your taxable income, credits reduce your tax–dollar for dollar. Said another way, whereas a $100 tax deduction for a low-income taxpayer might save him $10 or $15 in tax, a $100 credit saves him $100. Note, however, that the Retirement Savers Tax Credit is not refundable. This does not mean you can’t get money (e.g,. a refund) when you file your taxes if you take the credit. Rather, a tax credit’s status as nonrefundable simply means the credit cannot reduce your overall tax liability (including what you pay throughout the year via federal income tax withholding) to below zero.
If you’re skeptical about the credit and your ability to double-dip (i.e., take a deduction and a credit for the same savings), I hear you. Twice benefiting (three times if you count the additional retirement security you create by saving) from the same decision is a true tax rarity. If you qualify, take a few minutes to consider saving for retirement. Although you might feel financially stretched and unable to save, the Retirement Savers Credit just might make saving within your reach.