Start Saving For Retirement and Get Money Back From The Government
The sooner you begin saving for retirement the better prepared you’ll likely be. Low to middle income taxpayers may have a more difficult time saving, however when there’s a will, there’s a way. And the IRS has created a program specifically designed to make it easier for low and mid-income taxpayers to save and invest for retirement. If you are trying to save or know someone who is, perhaps the information that follows will prove to be the incentive you need to start saving regularly for retirement.
Many non-savers are not aware of the government’s Retirement Savings Contribution Credit. It is more commonly known as the Saver’s Credit. If you qualify, you can save significantly and get money back that goes right into your pocket.
The credit which can be from 20% to 50% of your total annual contribution is available to those whose Adjusted Gross Income is between $16,251 – $50,000. And those amounts vary according to how you file. If you are married and file jointly your AGI can be $32,501 – $50,000. If you file as Head of Household you qualify for the credit if your AGI is $24,367 – $37,500. All other filers will quality for the credit when their AGI falls within the following range: $16,251 – $25,00.
The chart below clarifies:
Adjusted Gross Income
Married filing joint Head of household All other filers Credit
$0-$30,000 $0-$22,500 $0-$15,000 50% of contribution
$30,001-$32,500 $22,501-$24,375 $15,001-$16,250 20% of contribution
$32,501-$50,000 $24,376-$37,500 $16,251-$25,000 10% of contribution
Over $50,000 Over $37,500 Over $25,000 credit not available
The only other requirement is that you are over 18, are not a fulltime student and are not a dependent on anyone else’s tax return. This is a great incentive for young people just starting to work. Even though retirement is the furthest concern for young people, if more can be inspired to save, they will over time gain a great sense of confidence. Money in their pocket at the end of the year is always a great incentive.
Susan and John are married and file their federal income tax return jointly. Let’s say their adjusted gross income would be $34,000 if they had not made any retirement contributions. However, Susan elected to have $2,000 contributed to her employer’s 401(k) plan. John made a deductible contribution of $2,000 to an IRA as well. As a result of these contributions, their actual adjusted gross income is $30,000. If their Federal income tax would have been $3,000 (after applying any other credits to which they are entitled) without having made any retirement contributions, then their federal income tax as a result of making the $4,000 retirement contributions will be only $400 after application of the saver’s credit and other tax benefits for the retirement contributions. Thus, by saving $4,000 for their retirement, Susan and John have also reduced their taxes by $2,600.
Saving for retirement at the earliest age possible pays in more ways than one. The government makes it desirable to contribute by giving low to middle income taxpayers a significant tax credit, which puts more money back into your pocket. You may eventually grow out of the tax brackets that qualify you for the credits, however the credits are motivation to start saving. And the longer you save, the sooner you’ll be able to then begin to look into other long term investment options.
This content is provided for informational and educational purposes only. The information, analysis and opinions expressed herein reflect our judgment as of the date of writing and are subject to change at any time without notice. They are not intended to constitute legal, tax, securities or investment advice or a recommended course of action in any given situation. All investments carry a certain risk and there is no assurance that an investment will provide positive performance over any period of time. Information obtained from third party resources are believed to be reliable but not guaranteed. Past performance is not indicative of future results. Edward Storer offers investment advisory services through Dynamic Wealth Advisors.