Are You Struggling To Build Up Your Nest Egg? Ask Your Tax Expert About The Retirement Savings Contribution Credit.
“The non-refundable tax credit known as a saver’s credit may make it easier for some people to put more away for retirement.”-Debra May.
If you are like many Americans, you may find it challenging to carve out the money you need to increase your retirement savings. It’s understandable, given the economy’s current abysmal performance, runaway inflation, and other economic woes.
An often forgotten “gift” from the IRS, the retirement savings contribution credit (saver’s tax credit), gives specific individuals a chance to get tax breaks beyond those they may receive by contributing to individual IRA plans or employer-sponsored retirement plans. Depending on your retirement plan contributions, tax filing status, and adjusted gross income, a saver’s tax credit may make it a little easier to bulk up your savings and offset the expense of funding a qualified account.
The retirement savings contribution credit may apply to eligible taxpayers making salary deferral contributions to SEPs, 403bs, 401ks, SIMPLE IRAs, Thrift Savings Plans, or government 457 plans. In a salary deferral contribution arrangement, participants choose to have a portion of their wages contributed to the employer plan, subject to statutory limits, rather than have that money paid directly to them in cash. People who have traditional IRAs or Roth accounts may also qualify for saver’s credits, as well as those making contributions to tax-advantaged savings accounts benefiting disabled persons and their families. (ABLE accounts).
Depending on your reported “adjusted gross income,” or AGI, the saver’s tax credit is 10%, 20%, or 50% of your eligible contribution. Be aware, though, that there are currently limits in place. You’ll need to consult the IRS website to understand current limitations better and determine if you qualify. Other factors determining your qualification include age-you must be at least 18 by the end of the applicable tax year.
Also, you cannot get this credit if you are claimed as a dependent on anyone else’s tax return or are a full-time student.
How can a saver’s tax credit help you save money?
For those who qualify, claiming a retirement savings contribution credit reduces your income tax liability in two ways.
First, contributing to your qualified plan gives you a tax deduction. Secondly, your saver’s credit reduces taxes you owe, dollar for dollar.
For instance, let’s say in 2022, a person was married, earning $39,000. Their spouse was unemployed and contributing no earnings. If the working spouse contributed $1,000 to their IRA, they would show an AGI of $38,000 on their tax return. In this case, they could claim a 50% saver’s tax credit amounting to $500 for their IRA contribution.
How do you claim this credit?
As your tax expert or financial advisor will explain, there are instances when retirement savings will not qualify for the saver’s credit. For example, if you switched jobs and rolled over money from your old company account to a traditional IRA, that contribution is ineligible. There may be other things that make you ineligible as well.
Once you and your advisor have determined that you qualify for the retirement savings contribution credit, you must complete IRS Form 8880. On this form, you’ll enter your total contributions, along with your AGI, to calculate the amount of your credit. Once you’ve determined that amount, you will enter the number on Form 1040 and file Form 8880 with your tax return.
The Recap: When it comes to taxes, you never want to pay more than necessary. The saver’s credit is one often-overlooked way to boost your savings power by reducing taxes. Private sector and government employees who qualify for this credit may experience a significant boost in their retirement savings. It’s definitely worth asking your financial professional to help you.