Saving money for retirement can be difficult, especially if you’re living paycheck to paycheck. Every dime counts, and putting $50 into savings can feel like a punishment when you know that money could go toward something you need or want now.
But what if there was some incentive—other than retirement—that could inspire you to save, even when you’d rather spend that money immediately?
The Savers Credit
Also known as the Retirement Savings Contributions Credit, the Savers Credit is meant to be an incentive for lower-income people to start saving for retirement. It can be worth up to $1,000 for an individual and up to $2,000 for married couples filing jointly. The credit can range from 10 percent to 50 percent of your retirement contributions —up to $2,000 for single filers or $4,000 for married couples filing jointly.
Who is eligible for the Savers Credit?
You may qualify for this tax credit if you make contributions to an IRA, a Roth IRA, or an employer’s pension plan, such as a 401(k) or 403(b), and:
- You were born before January 2, 1993.
- You are not a full-time student during the calendar year.
- You were not claimed as a dependent on another person’s return.
- Your income in 2013 was less than $29,500 if filing individually, less than $44,250 if filing as head of household, or less than $59,000 if married and filing jointly.
Those are not very high income thresholds, especially when you consider that the limit for the earned income credit (EIC)—the benefit given to working low- to moderate-income people that can reduce the amount of tax they owe and also give them a refund—is $46,227.
This is important because the Savers Credit is nonrefundable, meaning once this or other credits wipe out your tax liability, you don’t get the difference back. A married couple with one child in 2013 can get an EIC of up to $3,250 (or $3,305 in 2014), which is apt to wipe out their entire tax liability and give them a refund of several hundred dollars.
The Savers Credit, on the other hand, may only give them up to $2,000 and offers no refund.
The IRS website offers more information on eligibility requirements for the Savers Credit, as well as details regarding the earned income tax credit.
Things to remember
If you’ve taken a distribution from your IRA or retirement account in the two years before the filing year, in the filing year, or in the year in which you prepare your tax return, you need to subtract these distributions from any contributions you have made.
With this rule, the IRS put a stop to the game some tax pros were playing. Some pros would have a client fund an IRA by April 15 for the filing year—2013, for example. Then in May or June 2014, if the client needed the money, he or she would draw it back out of the IRA. In the meantime, the client would get the deduction for the IRA contribution and the Savers Credit.
Is it worth trying to claim the Savers Credit? Absolutely. If you have made retirement or IRA contributions via payroll withholdings or by direct deposit, ask your tax pro or consult your tax prep software to see if you qualify. It costs you nothing to check on this, and you might be pleasantly surprised if it works for you.
Eva Rosenberg, EA is the publisher of TaxMama.com ®, where your tax questions are answered. She is the author of several books and ebooks, including Small Business Taxes Made Easy. Eva teaches a tax pro course at IRSExams.com and tax courses you might enjoy at http://www.cpelink.com/teamtaxmama.