Saving for retirement appears to be an all or nothing proposition in today’s economy. Some workers place money aside on a regular basis, but others struggle to save anything or believe they have plenty of time to build their nest eggs tomorrow. There are always financial obstacles to overcome, but increasing your knowledge can dramatically improve your chances of achieving your financial goals, especially for lower-income households.
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According to a new survey from Country Financial, one in four Americans admit they are not saving at all for retirement. Young adults are the biggest offenders, with 32 percent of Americans ages 18 to 29 saying they have zero retirement savings. Meanwhile, 40 percent of older Americans say they regret decisions they’ve made with their nest eggs. In fact, half of those with regret wish they started to save earlier in life.
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Of those Americans not saving anything for retirement, 46 percent say it’s simply not possible for a typical middle-income family to save enough for a secure retirement. That is up 2 percentage points from a year earlier and the worst reading since March 2011. However, a little-known tax credit may help households better save for retirement.
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The Retirement Savings Contributions Credit, also known as the Saver’s Credit, is an overlooked benefit available to low- and moderate-income workers saving for retirement. The credit reduces a taxpayer’s federal income taxes and may be applied to the first $2,000 ($4,000 if married and filing jointly) of voluntary contributions an eligible worker makes to a 401(k), 403(b), or similar employer-sponsored retirement plan, or an individual retirement account. In order to qualify, you must be age 18 or older, not a full-time student, and not be claimed as a dependent on another person’s return.
As the chart below shows, the Saver’s Credit is worth a percentage of your contribution, and adjusted gross income limits do apply — the less you make, the greater the percentage. Income limits do change over time, so it’s important to check these numbers on an annual basis. The credit is also a benefit in addition to other advantages, such as tax deductions on retirement accounts.
The IRS provides the following example of the Saver’s Credit: “Jill, who works at a retail store, is married and earned $30,000 in 2014. Jill’s husband was unemployed in 2014 and didn’t have any earnings. Jill contributed $1,000 to her IRA in 2014. After deducting her IRA contribution, the adjusted gross income shown on her joint return is $29,000. Jill may claim a 50 percent credit, $500, for her $1,000 IRA contribution.” That’s a 50 percent return for just making the contribution to her IRA. Workers need to use Form 1040, 1040A, or 1040NR to file their taxes with the credit, which is detailed on Form 8880.
In 2012, more than 57 million households were eligible for the Saver’s Credit, but less than one-fifth actually took advantage of it, according to the Transamerica Center for Retirement Studies. While households eligible for the tax credit may find it difficult or nearly impossible to save for retirement, the responsibility ultimately falls on individuals. Nobody cares about your money and future as much as you do. The earlier you start making sacrifices and placing money aside for retirement, the better off you will be.
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