Retirement Savings Contributions Credit aka “Saver’s Credit”
I have two kids over 18 that are I am trying to encourage to save for retirement. I remember reading earlier about the “Saver’s Credit” that the IRS allows and ran across a reference to it again this morning. Thought I should do some investigating so I can do some more ‘encouraging’.
In order to encourage contributions to retirement plans by low- to moderate-income tax payers, the federal government developed the Retirement Savings Contribution Credit in 2002. For those who are eligible, this credit will reduce or eliminate the income tax the taxpayer may owe.
A taxpayer can receive a tax credit of up to 50 percent of the first $2,000 your contribution. So, although tax law allows you to put up to $4,000 in 2005 in your IRA, only $2,000 of that will count in figuring the saver’s credit of up to $1000. Since this is a tax credit rather than a deduction, it is also a better deal because the credit reduces the tax you owe to the IRS dollar for dollar rather than just reducing your taxable income.
According to IRS Tax Tip 2006-49, the Retirement Savings Contributions Credit applies to:
- Individuals with incomes up to $25,000 ($37,500 for a head of household) and married couples, filing jointly with incomes up to $50,000
- Individuals at least age 18, not a full-time student and that cannot be claimed as a dependent on another person’s return
| Credit Rate | Income for Married, Joint | Income for Head of Household | Income for Others |
|---|---|---|---|
| 50% | up to $30,000 | up to $22,500 | up to $15,000 |
| 20% | up to $32,500 | up to $24,375 | up to $16,250 |
| 10% | up to $50,000 | up to $37,500 | up to $25,000 |
| 0% | $50,000 or more | 37,500 or more | $25,000 or more |
My 21 year old for sure fits this bill. I am hoping to claim my 18 year old still, but if not we will definitely look at doing this. Even at the 10% matching, but especially at 50%, this would be a great return on your investment!
I read that it is even possible this year to have the ‘credit’ deposited into your IRA account rather than credited to your taxes - would almost be like having the government matching your contribution!
For More Information:
- IRS Tax Tip 2006-49
- Form 8880: Credit for Qualified Retirement Savings Contributions
- Publication 590: Individual Retirement Arrangements (IRAs)
- Tax Topic 610
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