Retirement savings contributions credit, or more commonly known as the saver’s credit, is a tax credit designed to help low- and moderate-income individuals save for retirement. It’s one of those hidden gems in the tax code that can make a significant difference in your retirement savings.
The idea behind the saver’s credit is simple: encourage people to save more by offering them a tax break. The credit is available to taxpayers who contribute to an eligible retirement plan such as an IRA, 401(k), or other qualified plan.
Who can qualify for the Saver’s Credit?
To be eligible for this credit, you must meet certain income requirements. For example, if you’re single and your adjusted gross income (AGI) is under $32,500 in 2020 ($33,000 in 2021), you might be able to claim it. Similarly, if you’re married filing jointly and your AGI falls below $65,000 ($66,000 in 2021), you might also qualify.
The amount of the saver’s credit varies depending on your income level and contribution amount. For instance:
– If you’re a single filer with an AGI of $19,750 or less and contribute at least $2,000 to a qualifying retirement account (like a traditional IRA or Roth IRA), then you can claim up to 50% of your contribution.
– If your AGI falls between $19,751 – $21k (single) /$39k (jointly) range than percentage drops down gradually until it reaches zero once incomes go over these limits.
How much money can I get back from my taxes through Saver’s Credit?
The maximum amount that someone could receive from their taxes through Saver’s Credit would depend on their filing status and how much they contributed towards eligible accounts over last year:
– Single filers may receive up to $1k
– Joint filers may receive up to $2k
– Head of household filers may receive up to $1.5k
So, if you’re eligible for the credit and contribute enough to your retirement account, you could get back a significant portion of what you put in.
Why should I bother with Saver’s Credit if it is not very much?
Even though the saver’s credit might not be life-changing money for most people, it can still make a significant difference in your retirement savings over time.
For instance, let’s say that you’re a single filer who qualifies for the maximum credit amount of $1,000 and decides to use it to invest in an IRA. If you maintain this contribution level each year until retirement (let’s say 30 years), assuming an average annual return rate of 7%, your account balance would grow by almost $100k!
That extra money could mean the difference between being able to retire comfortably or having to work longer than planned.
How do I claim my Saver’s Credit?
To claim the saver’s credit on your tax return, all you need to do is fill out IRS Form 8880 and submit it along with your other tax forms. It’s simple as that! The process is straightforward and doesn’t require any additional paperwork beyond what you already file.
Conclusion:
In conclusion, if you’re looking for ways to save more for retirement and reduce your tax bill at the same time, then consider taking advantage of the saver’s credit. It’s one of those rare opportunities where both personal financial goals align perfectly with government incentives.
As always before making any decisions on investments or taxes please consult a professional accountant or financial advisor who can help guide through these complex matters better suited towards their experience and expertise.