Saving for retirement requires effort and sacrifice -- especially since most people will need hundreds of thousands or even millions of dollars invested to provide sufficient income to supplement Social Security.
Unfortunately, many workers are actually passing up a chance to make their efforts to save easier. That's because they are unaware of an important chance to earn free money for retirement investing.
Image source: Getty Images.
Are you missing out on this important retirement tax credit?
The disturbing news that Americans are in danger of missing out on free money for retirement comes from the Transamerica Center for Retirement Studies.
The Center recently conducted a study and found that only 46% of workers are aware of a tax credit called the Saver's Credit. This includes 50% of employed workers, 41% of self-employed workers, and 24% of unemployed individuals of working age.
Not knowing about the Saver's Credit is a huge problem because, for those who are eligible, it is one of the most valuable sources of free retirement funds out there. Essentially, it provides a tax credit that is worth up to 50% of the amount that you invest in eligible retirement accounts. There is a cap on the credit, though. You can claim the credit for up to $2,000 in retirement account contributions if you are a single tax filer or up to $4,000 if you are a married joint filer. That means the credit is worth a maximum of $1,000 for single tax filers or $2,000 for married joint filers who contribute the max to their retirement accounts.
The exact credit you are eligible for depends on your income, and the income thresholds change annually. Here is how much your tax credit is worth in 2022 based on your income and tax filing status.
|
Amount of your tax credit based on income and filing status |
Married Filing Jointly (AGI) |
Head of Household (AGI) |
All Other Filers (AGI) |
|---|---|---|---|
|
50% of your contribution |
$0 to $41,000 |
$0 to $30,750 |
$0 to $20,500 |
|
20% of your contribution |
$41,001 to $44,000 |
$30,751 to $33,000 |
$20,501 to $22,000 |
|
10% of your contribution |
$44,001 to $68,000 |
$33,001 to $51,000 |
$22,001 to $34,000 |
|
0% of your contribution |
Over $68,000 |
Over $51,000 |
Over $34,000 |
DATA SOURCE: IRS.
Remember, a tax credit is not the same as a deduction -- it is far more valuable. Credits reduce your tax bill on a dollar-for-dollar basis rather than just reducing taxable income.
If you owe $3,000 in taxes and get a $2,000 credit, the full $2,000 is wiped right off your tax bill, and you're left owing just $1,000. So, the IRS is essentially giving you as much as $2,000 free if you make a $4,000 contribution to a retirement account as a married couple. Your $4,000 contribution will only reduce your take-home income by half that amount once you claim the credit.
This credit is also on top of any other deductions you get. So, if you contribute $4,000 to an IRA, you can typically deduct that $4,000 from your taxable income and get a $2,000 credit in addition.
Don't leave money on the table
More than half of Americans who don't know about this credit could miss out on the chance to get valuable help saving for retirement. If you were one of them, now you are aware of the chance to earn free money, and you can make plans this year to contribute enough to your retirement accounts to earn the full amount Uncle Sam is offering.
