It is no secret that the government is concerned we are not saving enough for retirement. Study after study has shown that the vast majority of American workers will not be able to continue their current lifestyle in retirement unless they ramp up their savings significantly. Meanwhile, government experts point out that Social Security was never intended to be a standalone retirement plan. When the Social Security law was first passed, legislators viewed the program as one leg of a three-legged stool. They expected the monthly stipend from Social Security to be supplemented by personal savings and company pensions.
We all know what has happened to the traditional company pension, and that makes personal savings even more important. Perhaps that is why the Federal government and the IRS are reminding taxpayers yet again that they may be eligible for the Retirement Savers’ Tax Credit. This tax credit is meant to encourage low and middle-income taxpayers to put money aside for retirement, and you could be eligible for it and not even know it.
How the Credit Works
The Retirement Savers’ Tax Credit is equal to 10 percent, 20 percent or 50 percent of the amount you contribute to a retirement account, based on your income. The maximum amount of the credit is $1,000.
Many people think that the retirement savers’ tax credit is only available to the working poor, but that is not the case. For 2014, married taxpayers who file a joint return can earn up to $60,000 and still qualify for the credit. Single taxpayers who earn up to $30,000 can take the credit, while those filing as head of household can earn up to $45,000 and still get a break.
Virtually every personal retirement program qualifies for the Retirement Savers’ Tax Credit, including the 401(k), 403(b), and 457 plans offered by employers and both the traditional and Roth IRA. The newly-created MyRA account also qualifies for the credit.
You must be at least 18 years of age to qualify for the Retirement Savers’ Tax Credit, and you cannot be a full-time student or be claimed on someone else’s tax return. Other than that, virtually everyone who contributes to a retirement plan and meets the income requirements is eligible for this credit. It should be noted that the Retirement Savers’ Tax Credit does not affect your eligibility for other retirement-related tax breaks. You can still get full credit for your IRA contribution and 401(k) funding – the Retirement Savers’ Tax Credit is in addition to those savings.
It pays to check your eligibility for the Retirement Savers’ Tax Credit even if you think you do not qualify. Virtually every online and software-based tax preparation program includes a questionnaire about the credit, making it easy to test your eligibility as you enter your tax information.
You should be saving for retirement because it is the right thing to do and you will need that money when you stop working. Even so, it never hurts to have an extra incentive. The government know that, and they created the Retirement Savers’ Tax Credit precisely for that reason. If you are eligible for this credit and not taking it, you could be leaving money on the table and overpaying your tax bill.