Retirement may seem years or even decades away. Yet by planning and saving now, you can enjoy a relatively stress free retirement. Additionally, by starting to contribute to your retirement savings now, you can take advantage of the Saver’s Credit, which allows you to reduce your tax liability. If you are unsure of how you can benefit from making contributions into your retirement savings, consult with your tax professional or accountant, such as M-E Accounting & Tax Services, Inc. in Cape Canaveral, FL.
Another point to keep in mind is that when you are not saving for retirement, you are not only losing your Saver’s Credit, but you are also losing the interest income on retirement savings. Why? Because your principal is not growing. Let’s look at a few more important keys to understanding how the Saver’s Credit works.
Eligibility Requirements for the Saver’s Credit
So how much of a credit could an individual taxpayer be eligible for? First, you need to be at least 18 years old, not currently in school full-time and not a dependent on another individual’s return. A full-time student is defined as someone who was enrolled as a full-time student at a school or took a full-time on-farm training course given by a school or various government agencies. A school can be a trade, technical or mechanical school, but cannot include on-the-job training courses or schools that only offer courses through the Internet.
The credit amounts available are 50%, 20% or 10% of your retirement plan or IRA contributions up to $2,000 or $4,000 if married and filing jointly, depending on your adjusted gross income (AGI). These accounts can count toward the Saver’s Credit, which includes a traditional or Roth IRA, 401(k), Simple IRA, SARSEP, 403(b), 501(c)(18) or governmental 457(b) plan, as well as your voluntary after-tax employee contributions to your qualified retirement and 403(b) plans.
When Can You Take It?
This credit can be taken after adjusting your income for any contributions. However, if you or your spouse took a distribution from your retirement fund, then that will reduce your Saver’s Credit. In addition, this credit is non-refundable. This means that while the credit can reduce your tax liability, it cannot be used to increase your tax refund.
It is important to note that the credit is reduced as your income increases. So once you reach over $61,000, you will be ineligible to collect the credit on your retirement funds.
For those who have not started a retirement fund, this Saver’s Credit can be a great incentive to get started. If your employer offers a retirement fund, then you should consider taking advantage of it, especially if the employer offers a matching contribution program. Not only can you use the Saver’s Credit for your contribution, not the amount contributed by your employer, but you can also see your savings account grow with your employer’s contributions.
Benefits of the Saver’s Credit
There are several benefits to taking advantage of this credit, but the most important is the reduction of your tax liability. Additionally, you enjoy the benefits of a tax free contribution and an additional credit for making that contribution.
For those who are married and filing jointly, you have the benefit of having the credit doubled. So if only one individual is employed, then you can still take advantage of the full $2,000 Saver’s Credit. Exploring the options available to start an IRA might be worth the time. Depending on your age, you may also be able to make a contribution known as a catch-up in addition to the normal annual contribution. So you will be able to take advantage of all the Saver’s Credit.
This particular credit is also geared toward those who might have less incentive to save for retirement due to a lower income. By providing a credit, then you have the ability to save for retirement and enjoy a tax benefit. However, it is important to be sure that you are maximizing your contributions and planning with your tax professional to maximize any deductions or credits that you might receive from your contributions. When considering your retirement contributions, work with your employer to take the maximum available and then working with your tax professional or accountant to determine how much of the Saver’s Credit is available for you!
Click on the link below to contact one of the tax professionals or accountants at M-E Accounting & Tax Services, Inc. in Cape Canaveral, FL who can assist you in determining how much of a Saver’s Credit you are eligible for!
M-E Accounting & Tax Services, Inc.