If you're struggling to save money for retirement, Uncle Sam's here to help. He wants to see you retire almost as much as you do!
To help you build that nest egg you'll need when your golden years finally roll around, the government offers an extra tax break to some people who save money for retirement. In order to qualify, your household must earn less than $50,000 in a year.
Even if you think that rule means you don't qualify, be sure to check again. Tax experts say many people don't claim this credit because they simply don't know about it. So, this goodie might be for you this year if, for example, you're just out of college, your spouse took a break from work, or you're working part-time and going to school part-time. (Full-time students and anyone under age 18 don't qualify.)
Here's how it works. First, you make a contribution to a retirement plan. That could be money you deposit into a traditional or a Roth IRA. Or, it could also be contributions made to a plan offered by your employer, like a 401(k) or a 403(b), where you elect to save a portion of your salary for retirement.
These plans already offer great tax benefits. In the case of traditional IRAs and employer plans, you can save money before ever paying taxes and watch your retirement stash grow faster. In the case of a Roth IRA, you pay taxes up front, but then you never have to be bothered by the tax collectors again (as long as you follow all the rules).
If you qualify for the saver's credit, you can get an extra tax break on top of these incentives. The credit offers as much as $2,000 to married couples and $1,000 for single individuals. You can take extra credit for contributing as much as $2,000 per person (or $4,000 per couple) to retirement accounts.
A credit reduces your tax bill dollar for dollar. The amount of this particular credit varies from 10% to 50% of your retirement contribution, depending on your household filing status and your income. That means a married couple who contributed $4,000 to a retirement plan and qualified for a full 50% credit just knocked $2,000 off their tax bill for the year. Not such a bad deal!
Fewer people will qualify for the entire 50% credit, but a 10% credit on a $4,000 retirement contribution still cuts $400 from your taxes. You can zero out your income tax bill using this credit, but you can't claim a refund for any additional credit.
There's one wrinkle. If you took a distribution or, sometimes, a loan from one of your retirement accounts within a certain time span, you have to subtract that money from any contributions that might be eligible for the credit this year. That includes contributions to a Roth IRA that you might have reclaimed, as well as any contributions made by a spouse. For retirement contributions made in 2006, you'll have to look for distributions you took beginning in 2004 through April 17, 2007.
How can this work for you? This is a variation on a concept that Fools like to call free money. Let's say your employer offers a 401(k) and offers to match a certain percentage of your contributions. If you don't save any money in the account, you're forfeiting that extra benefit from your employer. In other words, you're giving up free money.
If you save in a 401(k), putting away at least enough to get your employer's match, and you qualify for the saver's credit, you've just claimed a lot more free money. All you had to do was set aside a little of your salary for the future. That might not be easy, but how can you turn down all these perks?
If you're not contributing to a retirement plan because money just seems too tight, let all this free money encourage you to change your ways this year. The saver's credit remains around this year, and it will be made available to people at slightly higher incomes to make sure inflation doesn't erode its savings incentives.
If you're new to 401(k) plans, find out more at the 401(k) center. Then find out whether your employer offers up free money, and make this the year you start saving for your future.