Understanding Saver’s Credit
Brace yourselves, because today we’re going to be talking about taxes. A month after they’re relevant. This was done on purpose, so that you have almost a year to get excited about this tax tip: Saver’s Credit.
Saver’s Credit, also known as the Retirement Savings Contribution Credit, is one of the government’s best kept secrets. But it’s not a secret on purpose. In fact, it’s an enormous shame that only about 12% of American workers who would benefit the most from this credit even know it exists.
So what exactly is the Saver’s Credit? It’s a credit designed to help low and moderate income taxpayers save for retirement while saving on taxes. It does this by helping you offset the first $2,000 that you save for retirement by giving you up to 50% back on your refund.
The Saver’s Credit can be claimed for contributions to a 401K, 403(b), 457 plan, Simple IRA, SEP IRA, traditional IRA, or Roth IRA. Just note that you can’t claim any of your employer’s contributions.
If you’ve stopped reading because you know you personally won’t be eligible for the Saver’s Credit, try to think of people you know who this would help. This is as close to free money as the federal government gets—spread the word to those who need it. Now let’s talk about who’s eligible:
- Age 18 or older;
- Not a full-time student; and
- Not claimed as a dependent on another person’s return.
- Your retirement contribution must have been made during the tax year for which you’re filing.
- You also have to meet the income requirements:
2016 Adjusted Gross Income
|Credit||Single Filer||Head of Household||Joint Filers|
|50%*||$18,500 or less||$27,750 or less||$37,000 or less|
*The maximum credit for Married Filing Joint is $2,000 and for Single Filers is $1,000.
Keep in mind, since these are adjusted annually, you’ll need to check each year to see if you’re meeting requirements.
To understand how the Saver’s Credit works, let’s use a real world example.
Lisa and Matt are married and filing jointly. Their combined annual income is $34,000. Lisa contributes $1,000 to her 401(k) plan this year and Matt contributes $1,000 to his IRA this year. So, they will each receive a 50% tax credit of $500, and a joint tax credit of $1000 for the year.
You have until April 15th to make your retirement contribution and receive your credit for the prior year. Do keep in mind, however, that contributions to workplace plans will need to be made before the end of the calendar year.
Important: If you file taxes using an online system, chances are you’re using the 1040 EZ form. Unfortunately, the Saver’s Credit is not available on this form. Make sure to use Form 8880 to calculate your credit and attach it to form 1040, 1040A or 1040NR to take advantage of this opportunity.
The Saver’s Credit is one of those rare and beautiful things seldom found in the world of taxpaying: a win-win. If you’re eligible or you know someone that is, file this tip away for future reference. Take it one step further and shout it from the rooftops. Whatever you do, help stop this incentive from staying secret any longer.
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