They can also take an additional credit called the Qualified Retirement Savings Contributions Credit (also known as The Saver’s Credit). It was designed and implemented for lower and middle-income Americans. It was created to offer the needed financial assistance with saving money for retirement.
It is not a method to rely on as to how to build credit. This credit is a way for taxpayers who may be struggling with their finances. It assists them to defray some of the costs on contributions they are making to one of the many qualified savings plans, such as a 401(k), an IRA, a Roth IRA and others. The credit became a component of the tax code in 2006.
However, this credit proves to be of great value for taxpayers each year. It is still not a tax benefit that has gained widespread, mainstream appeal. Additionally, far too many people are failing to claim the credit which is rightfully available to them.
Qualifying for the credit does come with some specific requirements for eligibility. The amount you can earn from the credit also varies. That is based on how much money you have contributed over the course of the year and the percentage of those contributions that qualify.
Your adjusted gross income and filing status determine how much you may receive from the credit. You can receive 10%, 20%, or 50% of the money you contributed for the duration of the tax year, the maximum amount being $2,000 for single filers or $4,000 for married filing jointly. The credit is then applied to your income tax, and it lowers it dollar-for-dollar. Thus, it reduces the amount of money you owe Uncle Sam.
It is important also to keep in mind that the credit is non-refundable. Therefore, it may only be given to you for the purpose of lowering tax debt. If you do not owe anything for the year, the credit no longer applies and the money will not be given to you as part of a tax refund.
Qualifying for the Saver’s Tax Credit
The following are the necessary qualifications that must be met in order to claim the Saver’s Tax Credit:
- You must be 18 years of age or older.
- You may not be claimed as a dependent on another taxpayer’s return.
- You may not be considered a full-time student or have been a student for five or more months of the current tax year.
- You must deduct all retirement plan or annuity distributions that were received over the course of the tax year as well as the previous two years from the contributions that were made to your particular retirement account in order to properly calculate the amount of your credit.
- You must meet specific thresholds for income and filing status.
The threshold for income by filing status for years 2014-2017 are as follows:
- 2017 – Single Filer and Married Filing Separately: up to $31,000
Married Filing Jointly: up to $62,000
Head of Household Filers: up to $46,500
- 2016 – Single Filer and Married Filing Separately: up to $30,750
Married Filing Jointly: up to $61,500
Head of Household Filers: up to $46,125
- 2015 – Single Filer and Married Filing Separately: up to $30,500
Married Filing Jointly: up to $61,000
Head of Household Filers: up to $45,750
- 2014 – Single Filer and Married Filing Separately: up to $30,000
Married Filing Jointly: up to $60,000
Head of Household Filers: up to $45,000
Qualifying Retirement Plans
If you meet the above requirements for eligibility, then you need to consider if your contributions also qualify. This can be determined based upon the type of retirement plan you are using to save for your future. Most taxpayers opt for a standard 401(k) plan. These plans are usually offered by their employer.
However, there are many other options such as individual retirement accounts (IRAs), myRAs and others that may qualify to receive money through the Saver’s Tax Credit. The best part about the credit is that you can take it alongside any other deductions you are eligible to claim through your contributions.
Here are the types of qualifying accounts that could earn you money from the Saver’s Tax Credit:
- 401(k) plan
- 403(b) annuity (including voluntary after-tax contributions)
- 501(c)(18) plan
- 457 (Governmental) plan
- SIMPLE IRA
- SIMPLE 401(k) plan
- Traditional IRA
- Roth IRA
- Thrift Savings Plan
Some of these may be familiar already. You might even contribute to one or more of these types of savings accounts. A few of these accounts may be new to you. However, all of them will allow you to claim the Saver’s Tax Credit.
There are employer retirement accounts like the 401(k), 403(b), 501(c)(18) and the 457 Plan. They are provided to employees who work in public schools, churches, and government offices, just to name a few. SEP and SIMPLE plans are offered by small businesses. The Thrift Savings Plan is given out by the federal government. The private plans like IRAs and the myRAs offered by the Treasury Department are also considered eligible for the tax credit.
The qualifying accounts listed above include some of the more widely used by Americans who are planning for their retirement. As we have mentioned, many of them are offered by employers. The type of employer you work for will dictate the kind of retirement account that you are able to fund.
Most workers are given a 401(k). This is a plan for saving money. It takes a portion of each payroll check, before taxes, and deposits that money directly into the savings account. The “before taxes” delineation is what is critical. That is because it lowers the amount of your taxable income. Thus, it reduces how much money you could end up paying in taxes.
However, there is a catch. When you take the money out of that account you could face penalties and taxes if you withdraw the money too early. What exactly does “too early” mean? It relates to certain restrictions on these types of retirement accounts. They are in place to discourage you from touching the money you have saved for retirement before you actually retire. That way the funds will be there when you are ready to call it a day and you need that money to live on.
One of the more vital components to funding a 401(k) through work is that many employers offer to match your contributions. It is often up to a certain limit on an annual basis. This means that your boss is willing to contribute what is basically free money into your retirement fund. He does this by matching whatever you contribute from each check, up to whatever maximum amount has been previously established.
If you put $100 into your retirement account, your employer will also put in $100. This is obviously a fantastic arrangement. Of course, you should seek out any opportunity to take full advantage of this generosity. This is not standard operating procedure for every company. Therefore, if you happen to work for an employer who does provide this perk you can really clean up.
About Investment Retirement Accounts
When you do your research into finding the right retirement strategy, you have many choices in front of you. The 401(k) is the option that many savers go with when planning for the future. Another popular alternative is an IRA. This retirement account is different from the 401(k). With it, you have the ability to exert more power over how your contributions are invested.
When you fund a 401(k), you do not have much control over how that money is invested. If it is employer sponsored then they decide what investments are incorporated into the plan. Consequently, saving with an IRA lets you make all of those decisions instead.
Thus, you can put that money into stocks, bonds, securities, funds, and cash — you name it. It is important to understand that with that control comes responsibility. You need to ensure that you are properly and effectively diversified, and that is because you are the sole manager of your investment portfolio. You can have an adviser help you to make those financial choices. However, in the end, they are your decisions.
Different Types of IRAs
The traditional IRA has certain limits and restrictions that you will not have to face with a Roth IRA. This is another form of investment retirement account that some investors may prefer. That is especially since it does not matter how old you are to invest your money in one. Consequently, with a traditional IRA, you can only make contributions if you are under 70 years of age.
That is because the rules of investing in one stipulate that you must begin to take required minimum distributions (RMDs) at the age of 70 and six months. This is not the case with a Roth IRA. You can leave your money in one of those retirement accounts for as long as you please. Take it out or do not. Leave it to anyone you wish so they can inherit the entire amount after you pass away. The choice is yours.
Why are we explaining all of this? It comes down to taxes, of course. These savings accounts have certain tax implications and consequences. You or your beneficiaries may not owe any income tax on the money that is withdrawn from the account.
With respect to a Roth IRA, in particular, withdrawals are tax-free. That is because the money is taxed when it goes into the retirement account. A traditional IRA works the other way around. The money goes into the account before taxes, much like the 401(k). However, it gets taxed when it is taken from the account as it is considered taxable income.
Taking Deductions for Contributions
Deductions are a great way to reduce your taxes. The law provides taxpayers with a full range of opportunities to lower their taxable income. There are tax deductions for landlords, for the self-employed, the unemployed, and individuals and couples who are saving their money for retirement. The trick is to get as many as you can.
As we have mentioned, the Saver’s Tax Credit can mean a sizable chunk of change removed from your tax liability in real dollars. That is how the Saver’s Tax Credit works. You can take that money and put it toward your final tax bill.
That is even after you count all of the useful tax benefits that may come with taking the deductions that you are eligible for on your taxable income. These deductions are offered for money put toward qualifying retirement account contributions.
Taking these deductions count above the line so you do not need to itemize them in order to claim them Additionally, you are typically allowed to deduct all of your qualified contributions in full, up to their limits for the tax year.
The Roth IRA is beneficial to investors due to the lack of restrictions on age and withdrawals. Additionally, in the way you can claim deductions on the money you contributed to the retirement account. Since this money is taxable when it gets contributed the amount can count toward the Saver’s Credit. Best of all, the Roth IRA retirement account provides tax-free capital gains earnings and your withdrawals are not taxed either.
You are allowed to make contributions to a Roth IRA retirement account. It requires a modified adjusted gross income that is under $132,000 if you are filing as single. It is $194,000 if married and filing a joint income tax return.
Consequently, let us say your modified adjusted gross income falls between $10,000 and $132,000 for filing single and $184,000 to $194,000 if married and filing jointly. Then, the maximum on your contributions into your Roth IRA retirement account will be decreased.
Contributions made to any of the qualifying retirement accounts listed previously can equal up to $2,000 or $4,000 applicable in Saver’s Tax Credit. However, you need to remember that contributions can help you become eligible for reductions in your income taxes. Any monetary distributions taken from the account during that same period of time may ultimately reduce the amount of money you receive when calculating the size of your credit.
The Saver’s Tax Credit can be taken in addition to the deductions you are allowed to claim from the contributions to a 401(k) plan or traditional IRA. Thus, you are getting multiple tax breaks from the arrangement.
You are already saving for retirement with money that is tax-deferred. The deductions and the credit bring down your tax liability. Additionally, the money earns compounding interest on the investments that are being funded through those types of accounts.
Earning the credit is designed to help you save for your retirement. The amount of money you put away will help you get as much as possible from the tax credit. By taking withdrawals and distributions from the retirement account while still making contributions, you are going to minimize or effectively negate the credit entirely.
Many of these retirement accounts come with penalties for early withdrawals. That is to dissuade investors from tapping into this money before it is necessary. The credit and how much it is worth will follow suit by ultimately costing you in the end.
Calculating the amount you can receive when claiming the tax credit can become quite complicated. Also, it is very costly when you figure all of the contributions and distributions simultaneously over time. The more money you put in, the more your credit could potentially be worth to you at tax time.
In order to claim as much as possible through the Saver’s Tax Credit on your contributions, make sure that you meet the deadlines in place for each type of retirement savings account. Since many of them differ from one another in a number of aspects, the deadlines and expectations will often vary.
Contributions made to 401(k) plans and other retirement accounts are offered through an employer. These must be made by the end of the calendar year in order to help you qualify for the Saver’s Credit. This is different for contributions made to an IRA retirement account.
That is because any such deposits that were made on or before the April due date of your tax return will be eligible. For the coming year, that due date is April 18, 2017. Therefore, any deposits made to any IRA or myRA retirement accounts will be counted on a tax return for 2016.
Determining the Amount of the Credit
The Saver’s Tax Credit is worth either 10%, 20%, or 50% of the contributions made to a retirement account. Taxpayers with lower reported incomes will be the recipients of the highest rate. Calculate how much you might get. Do so by taking take a look at the thresholds that have been established for receiving the tax credit.
Contributions made to a qualified retirement account with a reported adjusted gross income of $18,500 or less filing single and $37,000 for married filers for 2017 are entitled to claim the tax credit. Though, it is at equal to half of the amount they contributed to their retirement accounts.
If you are making more than that, but still fall well below $20,000 if filing single or below $40,000 filing as married, then you can claim 20% on your funding through the tax credit. Anyone making in the range of $20,001 to $31,000 single, $40,001 to $62,000 married, can get a 10% tax credit. Remember, this is in addition to any applicable tax deductions you are entitled to claim.
Even though you qualify for the tax credit does not necessarily mean you will always benefit financially from it. These numbers are all best case scenarios. They do not fully reflect any specific tax scenario. In fact, a single filer can make up to $2,000 and married couples can make up to $4,000 in tax credits. It is the “up to” part of the equation that plays the biggest role.
There could be other deductions and credits that impact how much you ultimately receive from the Saver’s Tax Credit. It is true that the credit can potentially make quite a dent on your tax bill. However, your tax situation may vary from someone else. The amount they receive could be very different than what you earn through this tax benefit.
Claiming Your Credit
In order to claim the Saver’s Tax Credit on your contributions for the tax year, you will need to fill out the proper forms. Luckily this does not require a litany of any additional paperwork. You can still submit a Form 1040, 1040A, or 1040NR to file your income tax return.
You will need to submit a Form 8880 with one of those forms. It allows you to calculate exactly how much you can receive from the credit. Simply complete that form. Then, attach it to your income tax return. Send both of them to the IRS, together. That way you can declare the amount you should receive toward your tax bill in dollar-for-dollar credit.
Our Final Thoughts
The Saver’s Tax Credit is a beneficial tax break that could potentially bring taxpayers some much-needed relief as a reward for putting money away for their future. Millions of Americans claimed the tax credit on their income tax returns last year. Therefore, Uncle Sam handed out over a billion dollars to those qualifying taxpayers.
Nonetheless, despite so many taking advantage of this generous benefit, there are still millions more who are not. They may not even be aware that such a tax credit exists. Thus, they are missing out on much-needed financial assistance that they are already entitled to take.
According to recent surveys, only a third of workers who are making contributions to a workplace retirement account were apprised of the Saver’s Tax Credit. The rest are oblivious. They will continue to remain uninformed of this beneficial income tax break.
That is not you, now that you have reviewed all of this important information. You are much better informed of the requirements for eligibility. You know the necessary steps to take in order to claim the tax credit. Do not miss out on money that could be (and should be) yours. Fill out your Form 8880 and send it in this April!