Uncle Sam wants you to save for retirement. However, saving for retirement can be difficult, especially if your income isn’t very high. The saver’s credit – in IRS parlance, the “Credit for Qualified Retirement Savings Contributions” – can help by giving you up to a $1,000 non-refundable tax credit.
To take advantage of this credit, you need to make a contribution to a traditional or Roth IRA by April 15, 2014, or have contributed to your 401k (or similar workplace retirement arrangement) by December 31, 2013. In addition, you must meet the income restrictions for your filing status and other requirements as well.
Qualifications and Income Restrictions
To claim the saver’s credit, you must contribute to a qualifying retirement account, be at least 18 years old, and not be a full-time student or claimed as a dependent on someone else’s return. You are eligible to take the credit if you file as single, head of household, or married filing jointly, but not if you file as married filing separately.
Your adjusted gross income can’t be more than:
- $29,500 if you are filing as single
- $44,250 if filing as head of household
- $59,000 if filing as married filing jointly
How Much You Can Receive
To get the maximum benefit from this credit, you must have contributed at least $2,000 to a retirement fund. To calculate your credit, use the worksheet on Form 8880. The amount of credit you receive decreases as your income increases. The most you can receive is 50% of the amount of your contribution or 50% of $2,000 - whichever is smaller. For individual filers, the maximum credit is $1,000. Couples who file jointly can receive a credit of up to $2,000 if they each contribute at least that amount to a retirement fund.
Since this credit is nonrefundable, it can only reduce your tax liability. For example, if the tax you owe amounts to $500 and your credit is $1,000, you can reduce your tax liability to zero, but will not receive the additional $500 in a refund check. But keep in mind that your tax liability is not the same as what you owe in taxes when you fill out your return. For example, if you paid all the tax you owe during the year and reduce your tax liability by claiming the saver’s credit, you could receive a refund of the taxes you overpaid.
In most cases, if you’ve taken distributions from your retirement accounts in the past three years, your eligible contribution amount this year will be reduced. To determine the eligible amount, subtract your distributions from the amount that you contributed this year before continuing with the worksheet. This measure has been instituted to prevent abuse of the credit.
If your income is above the limit for the saver’s credit, you may still know someone who can benefit from it. Adult children who are no longer dependent have an opportunity to get a lot out of the saver’s credit, but probably aren’t aware of it. For example, if your son or daughter is no longer a full-time student, isn’t your dependent, and meets the income restrictions, this credit can help him or her afford to save for retirement.
What incentives have you used to get started on retirement savings?