You probably know about the benefits of tax-deferred investment accounts. But did you know that there is a special IRS provision that potentially allows you to save money just for being a retirement saver? The so-called "saver's credit," formally known as the Retirement Savings Contributions Credit, permits certain low- to middle-income workers to claim a tax credit for making eligible contributions to an IRA or most qualified workplace retirement plans.
But this tax break is currently going largely untapped. According to a study by the nonprofit Transamerica Center for Retirement Studies, only about a third of U.S. workers are aware of the saver's credit.1
The IRS Says …2
Here is a rundown on the basic rules governing the credit.
In order to claim the credit, the IRS requires that you:
• Are at least 18 years old;
• Are not a full-time student; AND
• Cannot be claimed as a dependent on another person's tax return.
Retirement plans eligible for the credit include:
• Traditional or Roth IRAs
• 401(k)s and 403(b)s
• SIMPLE IRAs
• 501(c)(18) or governmental 457(b) plans
• Voluntary after-tax employee contributions to qualified retirement and 403(b) plans.
The Amount You Can Claim
According to the IRS, "The amount of the credit is 50%, 20% or 10% of your retirement plan or IRA contributions up to $2,000 ($4,000 if married filing jointly), depending on your adjusted gross income (reported on your Form 1040 or 1040A)."
Here's a breakdown for tax year 2016:
*Single, married filing separately, or qualifying widow(er).
To learn more about the saver's credit visit the IRS website. For help shaping up your retirement planning and/or tax planning strategy contact your financial advisor.
1. Transamerica Center for Retirement Studies, "Retirement Throughout the Ages: Expectations and Preparations of American Workers," May 2015.
2. IRS, "Retirement Savings Contributions Credit," updated February 22, 2016.
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