Especially for younger workers, the Retirement Savings Contributions Credit (Saver’s Credit) can be a great financial opportunity! First, remember that a tax credit is better than a deduction. By contributing to a retirement account, you can receive up to a 50% credit, on contributions up to $2,000 per individual. So, let’s say you owe $1,000 in taxes and qualify for the saver’s tax credit of 50%. If you contribute $2,000 to a retirement account then your entire income tax bill is reduced to $0. That is like instantly increasing your investment by 50%!
Now, as I discuss this, please recognize that I am not certified to provide any kind of financial counsel. So consider these tips to be like that shared by a friend. Please check with your accountant or professional financial planner to determine if this is best for your particular financial needs.
Who’s eligible for the credit?
According to the IRS’s website, you’re eligible for the credit if you’re:
- Age 18 or older;
- Not a full-time student; and
- Not claimed as a dependent on another person’s return.
Amount of the credit
The amount of the credit is 50%, 20% or 10% of your retirement plan or IRA contributions up to $2,000 ($4,000 if married filing jointly), depending on your adjusted gross income. Use the chart below to calculate your credit.
Retirement savings eligible for the credit
According to the IRS’s website,
The Saver’s Credit can be taken for your contributions to a traditional or Roth IRA; your 401(k), SIMPLE IRA, SARSEP, 403(b), 501(c)(18) or governmental 457(b) plan; and your voluntary after-tax employee contributions to your qualified retirement and 403(b) plans.
Rollover contributions (money that you moved from another retirement plan or IRA) aren’t eligible for the Saver’s Credit. Also, your eligible contributions may be reduced by any recent distributions you received from a retirement plan or IRA.
Example: Jill, who works at a retail store, is married and earned $35,000 in 2015. Jill’s husband was unemployed in 2015 and didn’t have any earnings. Jill contributed $1,000 to her IRA in 2015. After deducting her IRA contribution, the adjusted gross income shown on her joint return is $34,000. Jill may claim a 50% credit, $500, for her $1,000 IRA contribution.
How long do I have?
Obviously you can contribute throughout the year with your 2016 taxes in mind, but also you have until April 15 to contribute to a retirement account and have it count toward your 2015 taxes. Just designate on your contribution form to which year you want the contribution applied.
Special savings for military personnel and people in full-time ministry
Military personnel and ministers are both allowed to claim a housing allowance as a part of their compensation. While the amount of income dedicated to housing is still subject to payroll tax it does reduce your adjusted gross income and income tax liability. With that in mind, a person making a moderate income may still qualify for some of the higher credit amounts if part of one’s salary is dedicated to a housing allowance. So again, if this applies to yourself, then please check with your accountant or financial planner to see if this is beneficial to your financial well being.
Over the years, I took advantage of this credit on several tax returns. I hope many of my readers may as well! Have a good day!
photo credit: 401(K) 2012 via Flicker cc License – 1/25/16 with no changes