Saving for retirement is difficult when you have so many bills to pay today. And the bills just keep getting bigger. You’re probably already using every budget-stretching trick you can think of.
Here’s one you may not be aware of: the government is so eager to see Americans save for retirement that it is willing to pay you to do so.
Here’s how you can get up to $2,000 in free money by taking advantage of an underused tax break known as the saver’s credit.
What is the saver’s credit?
The saver’s credit, formerly known as the retirement savings contributions credit, is a tax credit available to middle- and lower-income taxpayers who made contributions to a retirement account during the tax year.
Individuals can claim up to $1,000 in credit, and married couples filing jointly can claim up to $2,000 in credit.
If you’re hearing about the saver’s credit for the first time, well, that’s common.
In fact, the saver’s credit is so underused that lawmakers have specifically asked that the Treasury Department publicly disclose it.
Who can claim the saver’s credit?
To be eligible, you must be at least 18 years old, not a full-time student, and not claimed as a dependent on another person’s tax return.
Following that, you must contribute to a retirement plan, which can be a 401(k) or another employer-sponsored plan, as well as a traditional or Roth IRA. Moreover, your earnings must not surpass the credit’s income thresholds.
How do you qualify for the saver’s tax credit?
You can take the saver’s credit if your adjusted gross income falls below these limits:
- $66,000 for a married couple filing jointly for 2021, $68,000 for 2022.
- $49,500 for a head of household filing for 2021, $51,000 for 2022.
- $33,000 for all other taxpayers (including individuals) filing for 2021, $34,000 for 2022.
Not eligible? A financial adviser can help you find other ways to get more from your retirement savings.
The amount of the saver’s credit is determined by your income, tax filing status, and the amount you contribute to an eligible retirement account during the tax year.
You may be able to claim 50%, 20%, or 10% of the first $2,000 you put in if you’re an individual, or $4,000 if you’re a married couple who files a joint return.
If you want to use all of the credit when you file your 2021 tax return, check the list below to see how much you can get:
If you’re married and file jointly
- You can take the 50% credit if your adjusted gross income is $39,500 or less.
- You can take the 20% credit if your adjusted gross income is between $39,501 and $43,000.
- You can take the 10% credit if your adjusted gross income is between $43,001 and $66,000.
- You get no credit if your adjusted gross income is over $66,000.
If you file as a head of household
- You can take the 50% credit if your adjusted gross income is $29,625 or less.
- You can take the 20% credit if your adjusted gross income is between $29,626 and $32,250.
- You can take the 10% credit if your adjusted gross income is between $32,251 and $49,500.
- You get no credit if your adjusted gross income is over $49,500.
For all other taxpayers (including individuals)
- You can take the 50% credit if your adjusted gross income is $19,750 or less.
- You can take the 20% credit if your adjusted gross income is between $19,751 and $21,500.
- You can take the 10% credit if your adjusted gross income is between $21,501 and $33,000.
- You get no credit if your adjusted gross income is over $33,000.
So how much can I get?
The math for the saver’s credit isn’t too difficult.
Suppose you’re a married couple filing jointly, you made $38,000 last year, and you contributed $1,000 to an eligible account. Your credit would be worth half of your $1,000 in contributions, or $500.
If you put in $5,000, only the first $4,000 will be counted, and your credit will be confined to $2,000.
Keep in mind that a credit is far better compared to a tax deduction. A deduction simply reduces the amount of your income that is required to pay, while a credit reduces your tax bill dollar for dollar.
So, yes, it’s free money if you can afford to save for retirement in the first place. If your budget is limited, consider downloading an app that invests with only your “spare change.”
What accounts are eligible?
The IRS provides several tax-advantaged options for saving for retirement — and claiming the saver’s credit.
You can also contribute to a traditional or Roth IRA, a SIMPLE IRA, a 403(b) plan (for certain employees of public schools and tax-exempt organizations), or the Thrift Savings Plan, which is available to federal employees and members of the uniformed services.
If you don’t already have an IRA, you can easily open one using a variety of investing apps.
The IRS also extends the savings credit to Americans who have ABLE accounts, which are disability savings plans.
Make sure you meet the deadline
Many tax breaks expire at the end of the fiscal year. For example, any charitable donations deducted on your 2021 tax return must have been made in 2021. Doesn’t that make sense?
However, you can make retirement contributions that count toward the saver’s credit for that tax year up until the April tax deadline.
To claim the saver’s credit, fill out IRS Form 8880 and attach it to your tax return. To complete Form 8880, you’ll need two pieces of information: your adjusted gross income as calculated on your income tax return and documents showing your retirement contributions for the year.
Is the thought of filling out yet another tax form making your head spin? Don’t worry, claiming your saver’s credit is simple with the help of good tax software that will guide you through the process step by step.