Many people who earn low to moderate income wages don’t realize that the federal government has set up a plan that will help them to get tax credit on a 401(k) or IRA retirement plan. It’s called the Retirement Savers Tax Credit and, for individuals it’s a tax credit that can be worth up to $1000. For married couples it doubles to $2000 and it’s a credit that can be claimed in addition to any other text deductions that you will receive for any other retirement account contributions that you make.
If you are 18 years of age or older and your earning up to $29,500, or if you’re the head of a family and your earning less than $44,250 you can claim the retirement savers tax credit. Married couples who wish to claim this credit will need to make $59,000 a year or less. The credit, as with most benefits that the federal government gives, is adjusted to keep up with inflation on an annual basis. One caveat is that if you are a full-time student or you’re being claimed as a dependent on someone else’s tax return, you won’t be able to claim this credit.
The way that the retirement savers tax credit is calculated is based on several factors including any contributions that an individual makes up to $2000 per person and that individual’s credit rate as well. Ranging between 10 and 50% of the amount contributed, the savers credit rate is highest for consumers with the lowest incomes that are doing their best to save for retirement. If you’re a married couple that earned 30,000 last year for example, and you put $1000 into your traditional IRA, there would be a $500 credit waiting for you at years end. Keep in mind that if you took a distribution from another retirement account in the last year your eligibility could possibly be reduced. Also, rolling over funds into your retirement account won’t count towards the credit as well.
While the savers credit may well increase your tax refund or reduce the amount of tax that you owe, in general the average taxpayer receives a very small benefit in actual dollars from the savers credit. For example, very few couples will actually get the $2000 savers credit that’s available and, due to other deductions and credits that they may have, the number may actually fall to zero. In 2010, for example, the average individual received $122 while heads of households received $165 and couples $204.
Begun as a temporary provision in 2002, the retirement savers tax credit became a permanent part of the tax laws in 2006. According to a Harris Interactive online survey in 2012 only about 25% of workers have actually heard of this credit however, including just 17% of workers who are in their 40s.
While the deadline has passed (unless you got a continuance) to qualify for the retirement savers tax credit in 2012, now that you know it’s available you can make sure that your 401(k), 403B, Thrift Savings Plan contributions and your 457 can be applied towards it for 2013. If you have any questions about this tax credit, your taxes in general or saving for retirement, please let us know and we’ll help you out in any way that we can.