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Half of all workers claim they don’t have enough income to save for retirement, according to a recent Transamerica survey. It’s an alarming situation to find yourself in, especially as you near the age when your peers begin exiting the workforce. But your situation might not be as bad as you think. You may be able to take advantage of a little-known government incentive that can help low-income people save for retirement more easily.
How to get up to $2,000 back from the government every year
The government offers people a variety of deductions and credits to help them save on their taxes. Deductions lower your taxable income for the year, while credits offer a dollar-for-dollar reduction of your tax bill. For example, if you owe the federal government $5,000, but qualify for a $1,000 tax credit, you’ll only owe $4,000.
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One of the best credits available to low- and moderate-income households is the Saver’s Tax Credit. This is worth up to 50% of your annual contributions to your retirement account on a maximum of $2,000 in contributions ($4,000 for married couples). That means individuals could get up to a $1,000 tax credit for contributing $2,000 to their retirement, while married couples could get up to a $2,000 credit for contributing $4,000.
The exact value of the credit varies depending on your tax filing status and adjusted gross income (AGI). Here’s a table to help you find out how much you might get:
Credit Rate
Married Filing Jointly
Head of Household
Single, Married Filing Separately, and Qualifying Widow(er)
50% of your contribution
AGI of $39,500 or less
AGI of $29,625 or less
AGI of $19,750 or less
20% of your contribution
$39,501 to $43,000
$29,626 to $32,250
$19,751 to $21,500
10% of your contribution
$43,001 to $66,000
$32,251 to $49,500
$21,501 to $33,000
0% of your contribution
More than $66,000
More than $49,500
More than $33,000
Data source: IRS.
As your income increases, the maximum credit you qualify for decreases, but you could still shave several hundred dollars off your tax bill, even if you don’t fall into the 50% tier.
Who qualifies for the Saver’s Tax Credit?
Any taxpayer who meets the income limits and the following criteria is eligible for the Saver’s Tax Credit:
You’re 18 or older.
You’re not claimed as a dependent on anyone else’s tax return.
You’re not a student.
For the purpose of this credit, a student is defined as anyone who was a full-time student at a trade school or university during any part of at least five calendar months during the year. It also includes those who take full-time, on-farm training courses.
How to get the most out of the Saver’s Tax Credit
If you’re able to free up even a few hundred dollars for retirement, you can take advantage of the Saver’s Tax Credit this year. This will reduce your tax bill and could lead to a larger tax refund than you’ve gotten previously. If you turn around and stash this refund in an IRA or another retirement account, you could increase the size of your Saver’s Tax Credit for the next year.
Be strategic about where you stash your retirement savings to get the most out of it. If you choose a tax-deferred retirement account, you can enjoy a tax deduction on top of your Saver’s Tax Credit, but you’ll owe taxes on your withdrawals in retirement. If you go with a Roth account, your contributions won’t reduce your taxable income this year, but you’ll get tax-free withdrawals later.
If you have access to a 401(k) that provides a match, start here to get that extra money. A single adult earning $20,000 per year who qualifies for a 3% dollar-for-dollar 401(k) match could get an extra $600 from their employer if they contribute $600 to their 401(k) on their own. But that’s not all.
That $600 would reduce their taxable income for the year, bringing them into the 50% credit rate for the Saver’s Tax Credit. So in addition to setting aside $1,200 for their retirement, they’d also get another $300 knocked off their tax bill. This may come back to them in the form of a refund, which they could then put toward their retirement contributions for the next year.
The Saver’s Tax Credit income requirements change from year to year, so it’s important to look at these every year you plan to claim this credit. But whenever possible, take advantage of it to help your retirement savings grow as quickly as possible.
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