It's important to save for retirement to ensure that you'll be financially secure after you stop working. Yet for those who have to make ends meet with low incomes, it can be extremely difficult to save, and many think that the small amounts they're able to set aside just aren't worth the hassle.
The federal government offers incentives to help those with more-modest incomes make their savings more meaningful. These can be worth up to $2,000 for those who set money aside for retirement. By taking advantage of a provision known as the Retirement Savings Contributions Credit, or Saver's Credit for short, you can dramatically boost the impact that your savings will have.
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How the Saver's Credit works
The Internal Revenue Service (IRS) explains that the Saver's Credit is intended for low- to moderate-income workers. The provision offers money to savers through a tax credit. It applies to the first $2,000 that each individual contributes toward an IRA or to an employer-sponsored retirement plan like a 401(k).
To qualify, you must meet certain rules. You need to be at least 18 years old, and if you're listed as a dependent on someone else's tax return, you're not allowed to claim the credit for yourself. Students are also ineligible for the credit (anyone enrolled full time as a student for any part of five calendar months during the year is ineligible under IRS rules).
Even with these rules, the Saver's Credit is popular. More than 8.1 million taxpayers took advantage of the provision in the most recent year for which IRS data is available -- or more than one out of every 20 taxpayers filing that year.
How much will you get?
The credit amount is calculated as a percentage of your contributions up to $2,000. That percentage ranges from 10% to 50% depending on your income level. The table below tells you which percentage amount applies to you.
|
Credit Percentage |
Single or Married Filing Separately |
Head of Household |
Married Filing Jointly |
|---|---|---|---|
|
50% of contribution |
Up to $19,000 |
Up to $28,500 |
Up to $38,000 |
|
20% of contribution |
$19,001 to $20,500 |
$28,501 to $30,750 |
$38,001 to $41,000 |
|
10% of contribution |
$20,501 to $31,500 |
$30,751 to $47,250 |
$41,001 to $63,000 |
Data source: IRS.
So if you're a single person making $25,000 in adjusted gross income and you can set aside $500 in a retirement account, then you'll get 10% of the $500, or $50, back as a tax credit. A lower-income person making $18,000 will get a 50% credit, which would work out to $250 based on $500 in savings.
For married couples, both spouses can take advantage of the credit. So to get the maximum amount available, a married couple would need to have adjusted gross income of no more than $38,000 and have each spouse set aside $2,000. The 50% credit would apply, giving each spouse $1,000 in tax savings, for a total for the couple of $2,000.
Don't forget the other tax benefits
The Saver's Credit doesn't take the place of any of the other favorable tax provisions that apply to retirement savings. If you use a traditional IRA or 401(k), you still contribute on a pre-tax basis that can give you an additional deduction on your tax return. Those who use Roth IRAs can take tax-free distributions in retirement. And both types of accounts can grow over the course of your career without having to report income or gains along the way as taxable income.
If you're a lower-income earner, it's hard to save for retirement. But the Saver's Credit can make it worth your while to use IRAs, 401(k)s, and similar tax-favored accounts to build your retirement savings. Even if you can't get the full $2,000 credit amount, every little bit will help put you in a better financial position when you retire.
