Investing enough for the future can be a challenge, so it's crucial to take advantage of every possible form of assistance available. But you can do that only if you're aware of the help that's on offer.
That's why it's such troubling news that a recent TransAmerica study revealed just 43% of Americans are aware of one of the most valuable tax credits for retirement savings.
So, what is that credit most people don't know about, and how does it work?
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Millions of people are in the dark about this valuable tax credit
According to TransAmerica's data, the majority of Americans are unaware of a tax credit for retirement savings called the Saver's Credit. This credit could be worth up to $2,000 depending on income and tax filing status. So, those who don't know about it could be losing out on a great opportunity to build a more secure future with a little help from Uncle Sam.
The Saver's Credit is open to people with an adjusted gross income (AGI) below a certain threshold. The credit is worth up to 50% of the amount of money contributed to a qualifying retirement plan such as a 401(k) or IRA. The table below shows how much the credit is worth based on income and filing status in 2021.
|
If you're married filing jointly and your AGI is between: |
If you file as head of household and your AGI is between: |
If you have any other filing status and your AGI is between: |
This is how much your tax credit is worth: |
|---|---|---|---|
|
$0 to $39,500 |
$0 to $29,625 |
$0 to $19,750 |
50% of eligible contributions |
|
$39,501 to $43,000 |
$29,626 to $32,250 |
$19,751 to $21,500 |
20% of eligible contributions |
|
$43,001 to $66,000 |
$32,251 to $49,500 |
$21,501 to $33,000 |
10% of eligible contributions |
Table created by author. Data source: IRS
If your income exceeds these thresholds, you cannot claim the Saver's Credit. If your income falls within them, you can claim the credit on up to:
- $2,000 in contributions as a single filer
- $4,000 in contributions as married joint filers
This means the credit could be worth as much as $1,000 to $2,000 in free money depending on filing status and income level. To earn the full $2,000 credit, you'd need to be a married couple with income below $39,500 who contributes at least $4,000 to an eligible retirement investment account.
Why the Saver's Credit is so valuable
The Saver's Credit is an extremely valuable type of government assistance because of how tax credits work. They reduce your tax liability on a dollar-for-dollar basis.
If you get a $2,000 credit and you owe $2,500 in taxes, the credit reduces your tax bill down to just $500. The Saver's Credit is non-refundable, though. That means it can only reduce your bill down to $0. You won't get extra money back. So if you owe $1,500 in total federal taxes and are entitled to a $2,000 credit, you wouldn't owe any taxes thanks to the credit -- but you would lose out on $500 of the credit amount.
Investing in the types of accounts that earn you the Saver's Credit can also result in other tax breaks, such as tax-deductible contributions. The free money from the government that the Saver's Credit offers stacks on top of these other subsidies and can really go a long way toward helping you to build a more secure future.
That's why everyone should know about this credit so they can check if they're eligible and take advantage of it if they are.
