Did you know that a tax incentive could help pad your retirement account?
“Many workers who are saving for retirement may be missing out on the Saver’s Credit because they are unaware of it,” said Catherine Collinson, president of the Transamerica Center for Retirement Studies (TCRS). “For those who are not already saving, the Saver’s Credit could be a nudge to get them started, if only they knew about it.”
According to the 17th Annual Transamerica Retirement Survey, only one in three American workers are aware of this credit.
What is the Saver’s Credit, and who’s eligible to take it?
The Retirement Savings Contribution Credit, aka the Saver’s Credit, is a tax credit that may be applied to the first $2,000 of voluntary contributions that an eligible worker makes to a 401(k), 403(b) or similar employer-sponsored retirement plan, or to an IRA or myRA. The maximum credit is $1,000 for single filers or individuals and $2,000 for married couples.
“The Saver’s Credit is a tax credit above and beyond the advantage of tax-deferred savings,” Collinson said. “Because this double benefit sounds too good to be true, many eligible savers may be actually confusing the two incentives.”
A credit is a dollar-for-dollar reduction in the federal income taxes you need to pay, which can lower the tax you owe or increase your refund. The amount of the credit you can get depends on how much you contribute and your “credit rate.” Your credit rate ranges from 10 percent to 50 percent, depending on your income and filing status.
For an extra boost to your retirement savings, don’t spend the credit you receive. Instead, contribute it to your IRA or retirement plan.
You’re eligible for the credit if you’re age 18 or older, you’ve contributed to any of the retirement plans mentioned above during 2016 and you meet the adjusted gross income (AGI) requirements:
- Single filers with an AGI of up to $30,750 in 2016 or $31,000 in 2017
- Heads of household with an AGI of up to $46,125 in 2016 or $46,500 in 2017
- Married filing jointly with an AGI of up to $61,500 in 2016 or $62,000 in 2017
You cannot claim the credit if you’re a full-time student or are claimed as a dependent on another person’s tax return. To claim the credit, you’ll need to use Form 1040, Form 1040A, or Form 1040NR. You can’t use Form 1040EZ.
Even if you haven’t yet contributed to an IRA for 2016, you have up to April 18, 2017, to make an eligible contribution for 2016.
For more information, Transamerica has prepared a useful fact sheet and infographic. If you think you’re eligible, it’s well worth your time investigating the rules. You’ll thank yourself when you reach your retirement years with a little extra something in your savings account.