62% of Taxpayers Are Clueless About This Valuable Credit For Retirement Savers
You may know that 401(k) funds have a tax advantage, because contributions are taken out of your paycheck before the income tax is withheld and you aren't tax on this money until it's withdrawn in retirement. You're probably familiar with the fact that contributions to traditional Individual Retirement Accounts (IRAs) of up to $6,000 (or up to $7,000 if you're 50 or older) can be deducted from your taxable income in the year you make it, which saves you taxes immediately. If you're a personal finance superstar, you even know Roth IRA contributions are taxed in the year you make them, but not taxed at all when you withdraw them in retirement.
But a majority of U.S. taxpayers (62%) are unaware of a tax credit available to many folks who participate in a workplace retirement plan, or in a traditional IRA or a Roth IRA, according to the Transamerica Center for Retirement Studies. It's called the Retirement Savings Contributions Credit, or Saver's Credit.
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The Saver's Credit is a credit, not a deduction. This means it's a a dollar-for-dollar reduction in your gross tax liability, up to $1,000, and the amount you can claim depends on your adjusted gross income (AGI), tax filing status, and your contributions to a qualified plan. This tax break complements the built-in tax advantages of 401(k), traditional IRA, and Roth IRA plans by reducing your taxes even more.
The Saver's Credit can reduce the amount you owe, or increase your refund for taxes already paid. While it's a nonrefundable credit, so people with zero tax liability cannot receive the balance in cash, it can increase your tax refund of money taken out of your paychecks.
What is the Saver's Credit?
The Saver's Credit is designed to give low- and moderate-income folks an incentive to save for retirement.
There are just a few requirements. You need to have paid tax into a qualified plan (in addition to 401(k) and IRAs, employer-sponsored retirement plans like 403(b)s and 457 plans are eligible, as are SIMPLE IRAs and SEP-IRAs), be least 18 years old, not be claimed as a dependent on anyone else's tax return, and not be a full-time student.
It can be taken if you're single or married; both partners in a married couple can claim a Saver's Credit, so a couple can receive a maximum of $2,000.
A Saver's Credit can be taken for a given tax year up until Tax Day of the following calendar year. (Tax Day is usually April 15.) If you're filing 2018 taxes on Tax Day 2019, you can take the Saver's Credit until that day.
Income limits and savings
Here's the catch: This is only a credit for people who aren't high-earners.
To be eligible, your income needs to falls below certain thresholds. For 2018, for instance, you can get the Saver's Credit if you are married filing jointly, and your AGI is under $63,000. If you're filing as a head of household, your AGI must fall below $47,250. For all other filers, your AGI must be less than $31,000.
For 2019, the AGI threshold rises to $64,000 for married joint filers, $48,000 for head of household, and $32,000 for all other filers.
You'll receive a percentage of the available credit, depending upon your AGI, how much you contributed, and filing status. Because you still have time to get a Saver's Credit for 2018, here are the 2018 figures.
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 |
Here are the figures for 2019.
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 |
If you qualify, use the Internal Revenue Service's Form 8880, Credit for Qualified Retirement Savings Contributions, to calculate and make sure you receive the credit. You'll need to use Form 1040 with Schedule 3 or 1040NR when filing.
Keep this credit in mind, because it's one you might be able to claim every year, simply by doing what you should already be doing: saving for retirement.
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