Contributing To A Retirement Plan Can Equal Tax Savings
By: John H. Dingle, Jr., QKA
Who would have thought that saving for your retirement can be rewarding and have tax benefits. The Saver’s Credit provides that opportunity. It is a non-refundable tax credit available to eligible taxpayers who make salary-deferral contributions to their employer sponsored 401(k), 403(b), SIMPLE, SEP or governmental 457 plan, and/or make contributions to their Traditional and/or Roth IRAs. The Saver's Credit was made available for tax years 2002 to 2006 under the Economic Growth And Tax Relief Reconciliation Act of 2001(EGTRRA), and was made permanent under the Pension Protection Act of 2006 (PPA).
In order to qualify for the Saver's Credit you must be:
• 18 years of age or older
• Not a full-time student
• Not claimed as a dependent on someone else's return
To claim the credit, you will need to fill out Form 8880 and attach it to your Form 1040A or 1040. The tax credit ranges from 10 to 50 percent of each $1 you contribute, up to the first $2,000 you put in your 401(k). If you and your spouse both contribute to a 401(k) plan, you may both be eligible to receive a credit. The amount of your tax credit depends on the amount of your adjusted gross income.
Your credit will be reduced and possibly eliminated if you take a distribution from your retirement plans during the two years before, the year of, or anytime before the due date of your tax return.
The lower the tax payer’s AGI, the higher the Saver’s credit. This formula increases the incentive for lower-wage taxpayers to fund their retirement accounts.
Example
Joseph, whose filing is single, has an AGI of $25,000. Jospeh contributed $1,000 to his employer-sponosored 401(k) plan and also contributed $500 to his traditional IRA. Jospeh is therefore eligible for a non-refundable tax credit of $150 [($1,000 + $500 = $1,500) * 10%].
The Saver’s Credit is a great incentive to contribute to your company’s retirement plan or a Traditional and/or Roth IRA if you meet the AGI limits. The credit is in addition to any deduction that may have already been received for a retirement plan or IRA contribution and will reduce a person's tax liability dollar for dollar, but not below zero (meaning that you cannot get a refund of any unused credit). Think of it as Uncle Sam rewarding you for investing in your retirement.
John H Dingle, Jr., QKA works for Qualified Plans, LLC, a division of Hancock Askew & Co., LLP.
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