Source: 401kcalculator.org via flickr
If you are a low- to middle-income American, it can be tough to find money to set aside for retirement. However, if you haven't started investing for your retirement yet, you could be leaving lots of free money on the table. Thanks to a valuable tax credit, you could get thousands of dollars to invest for your retirement absolutely free.
Here's a quick primer on the Retirement Savings Contributions Credit and how much it could mean to your retirement.
What is the credit and who qualifies?
The Retirement Savings Contributions Credit, also known as the "Saver's Credit," is designed to encourage low- to middle-income taxpayers to save money for their retirement.
This credit can be applied to IRA contributions, or to your contributions to an employer-sponsored retirement plan such as a 401(k), 403(b), or governmental 457(b) plan. Many other less common types of retirement accounts are qualified as well.
The amount of the credit ranges from 10%-50% of the first $2,000 in contributions for the year ($4,000 if married filing jointly), depending on your income and filing status. For example, in order to take the full (50%) credit, married couples must have an adjusted gross income of $36,500 or less, but can still take a partial credit with an AGI of up to $61,000.
Here is a chart of the full eligibility limits based on income and filing status for the 2015 tax year, so you can determine whether or not you qualify for a credit.
| Credit Amount | Married filing jointly | Head of Household | All other filers (including singles) |
| 50% | AGI up to $36,500 | Up to $27,375 | Up to $18,250 |
| 20% | $36,501-$39,500 | $27,376-$29,625 | $18,251-$19,750 |
| 10% | $39,501-$61,000 | $29,626-$45,750 | $19,751-$30,500 |
| 0% | $61,001 and up | $45,751 and up | $30,501 and up |
Source: IRS
It's not the only benefit of retirement savings
As good as this credit can be, it's not the only good reason to use a designated retirement account. There are other tax benefits that can mean thousands of dollars more in your account when you're ready to retire, and many employers will match contributions up to a certain percentage of pay.
Here are just a few of the other benefits of retirement accounts
- 401(k) and most other employer-sponsored retirement plan contributions are made on a tax-deferred basis, meaning that you don't pay tax on that income until you withdraw it from your retirement account.
- Traditional IRA contributions may be deductible on your current income taxes.
- Roth IRA contributions are not tax-deductible, but qualified withdrawals are tax-free.
- All investments in retirement accounts are allowed to compound without annual capital gains or dividend taxes.
- Your employer may be willing to match a certain amount of contributions -- this is like getting even more free money for saving.
What it could mean to you
Consider an example of a 30-year-old married couple that earns $36,000 per year. They choose to save $4,000 in an IRA each year, of which $2,000 will be refunded to them in the form of a tax credit.
Assuming 7% average annual investment returns, which is conservative on a historical basis, this amount of savings could grow and compound to more than $550,000 by the time this couple reaches 65 years of age. Thanks to the tax credit, this nest egg would have only cost them $70,000 in savings over 35 years.
Bear in mind that this doesn't include any money your employer contributes to your retirement account on your behalf, and it is on top of Social Security income and any pension income you may have.
The bottom line here is that by combining the saver's credit with the other tax advantages (and possibly the employer contributions) of your retirement account, it's possible to build a comfortable retirement with a minimum of out-of-pocket expense.
Start early, and save what you can
The saver's credit is an excellent tool that can help you build a comfortable and secure retirement, but there are a few things to keep in mind in order to take full advantage.
First, it's important to start as early as possible. The most valuable tool investors have is time, since compound returns are better the longer they are allowed to grow. If you are 25 years from retirement, every dollar you invest now could be worth $5 by the time you retire, but if you're 35 years away, a dollar invested now could be worth $10 to your nest egg.
Second, make sure you invest responsibly. Before you get started, read more about how to invest in an IRA and what kind of stocks work best.
Finally, even if you don't have thousands of dollars to invest right now isn't a good excuse to not get started. Many major brokerages have no minimum balance requirement to open an IRA, so you could literally get started for a few dollars. Those few dollars can have a big impact on your eventual retirement security.
By starting early, investing wisely, and taxing advantage of the tax benefits at your disposal, you can build up a large nest egg for your retirement without too much money out of your pocket now.
