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You Could Get Free Money to Save for Retirement -- Seriously

By Matthew Frankel, CFP® - Nov 6, 2018 at 6:12AM

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A little-known tax credit could give you free money if you contribute to a retirement account. Here's how it works.

There's a little-known tax credit that gives low- to middle-income Americans free money for their retirement savings.

Many American workers are familiar with some of the tax benefits of retirement savings, such as the fact that their 401(k) contributions aren't included in their taxable income. Others know that they can get a deduction for traditional IRA contributions, or that they don't have to pay tax on the dividends received in their retirement accounts each year.

However, one of the least-known tax benefits of retirement saving is also one of the most potentially lucrative. If you're a lower- to middle-income taxpayer, you may be able to take advantage of the Retirement Savings Contributions Credit, which gives qualifying individuals free money from the U.S. government just for saving for their retirement.

Older man in dress shirt and tie sitting next to piggybank with money flying around.

Image Source: Getty Images.

The Saver's Credit

The Retirement Savings Contributions Credit, better known as the "Saver's Credit," is designed to incentivize low- and middle-income individuals to save money for their retirement.

Depending on your adjusted gross income (AGI) and tax filing status, the Saver's Credit can be worth as much as $1,000. And married couples can get the credit for both spouses, for a total possible credit of as much as $2,000 every single year.

It's also important to clarify that this is a tax credit, not a deduction. Unlike tax deductions, which reduce the amount of your income that's subject to tax, tax credits actually reduce your tax bill dollar for dollar. In other words, if you get a $1,000 Saver's Credit, you are literally getting $1,000 from the IRS just for saving for your retirement.

Here are some specifics. Depending on your AGI and filing status, the Saver's Credit can be worth 10%, 20%, or 50% of as much as $2,000 of your qualified retirement contributions for the tax year. Contributions to most common retirement accounts qualify -- including IRAs (traditional and Roth), 401(k)s, 403(b)s, Thrift Savings, and more.

Do you qualify in 2018 and 2019?

The IRS determines the Saver's Credit income thresholds every year, and they generally increase every year in order to keep up with inflation.

First, here are the Saver's Credit income brackets for the 2018 tax year. I realize that 2018 is almost over as of this writing, but you may be able to make 2018 retirement contributions well into 2019, so they're worth including. For example, traditional and Roth IRA contributions can be made for 2018 until the April 15, 2019, tax deadline.

Credit -- % of contributions

Married Filing Jointly

Head of Household

All Other Filers

50% of contribution

Up to $38,000

Up to $28,500

Up to $19,000

20% of contribution

$38,001 to $41,000

$28,501 to $30,750

$19,001 to $20,500

10% of contribution

$41,001 to $63,000

$30,751 to $47,250

$20,501 to $31,500

No credit

AGI over $63,000

AGI over $47,250

AGI over $31,500

Source: IRS.

Next, here are the recently announced 2019 Saver's Credit limits, which have been adjusted slightly upward.

Credit -- % of contributions

Married Filing Jointly

Head of Household

All Other Filers

50% of contribution

Up to $38,500

Up to $28,875

Up to $19,250

20% of contribution

$38,501 to $41,500

$28,876 to $31,125

$19,251 to $20,750

10% of contribution

$41,501 to $64,000

$31,126 to $48,000

$20,751 to $32,000

No credit

AGI over $64,000

AGI over $48,000

AGI over $32,000

Source: IRS.

This is on top of the other benefits of retirement saving

I've said before that if you qualify for the Saver's Credit, you are actually getting a three-pronged financial benefit when you contribute to a retirement account (four if your employer matches your contributions).

For one thing, retirement savings in general is tax advantaged. Tax-deferred retirement accounts like traditional IRAs and standard 401(k)s can get you a nice tax deduction each year, and after-tax accounts like Roth IRAs can give you tax-free income when you eventually retire.

Second, you'll be setting yourself up for financial security later in life. Too many American seniors rely exclusively on Social Security for daily expenses, and the program was never designed that way. In fact, Social Security is intended to provide about half of the average retiree's necessary income to maintain their standard of living.

And finally, the Saver's Credit is perhaps the best investment you'll ever find. There aren't too many ways you can invest up to $2,000 and get an instant 10%, 20%, or even 50% return on your money, but the Saver's Credit essentially does just that. And as long as you qualify based on your income, you can use the credit every year.

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