How Saver's Credit can Strengthen Your Retirement Plan

If you earn traditional wages at a workplace, your employer may sponsor a retirement plan like a 401(k) plan in order to let you save an increasing sum of money that you will gain access to once you are retired. Citizens who are at least fifty years old are allowed to save up to $24,000 annually by the IRS, and this figure lowers to $18,000 for persons who are younger. The money that goes into these retirement savings is not taxed until they would be later withdrawn.

Alternatively, your employer may provide a Roth version of this plan that imposes far stiffer upper limits on how much can be saved each year; as of this year, these savings limits are $6,500 and $5,500 for persons above and below 50 years of age, respectively. What provides an incentive to consider this plan is the fact that the money devoted to these savings will have already been taxed; as such, these savings will not be taxed once withdrawn at a later date.

Either aforementioned form of this retirement plan may benefit from a little-known tax credit called the Saver's Credit, which anyone who is at least eighteen years old may qualify for so long as their Adjusted Gross Income falls within certain maximum thresholds. A taxpayer's AGI throughout the year of 2017 must be lower than $62,000 if his or her filing status is married and the tax forms are being filed jointly; for single filers, the threshold is halved, resulting in a $31,000 upper limit. These upper limits, incidentally, will respectively increase by $1000 and $500 throughout 2018.

The Saver's Credit can easily be claimed by filing Form 1040 and its derivatives 1040A and 1040NR while meeting these criteria, although Form 1040EZ cannot be used to claim the credit at all. The credit can result in as much as $1000, or some comparable figure below that, being subtracted from the taxes that single filers must pay, and this benefit can double for married persons making a joint filing. However, neither dependents listed on another party's tax return nor full-time students are eligible for the credit.

The IRS website's page about Saver's Credit provides charts detailing what fraction of each of your contributions to your Individual Retirement Account generate credit when your filing status and AGI are taken into account. As stated previously, none of a single taxpayer's contributions to their IRA generate credit if their AGI for 2017 surpasses $31,000; beneath that, the credit rate becomes 10% if the AGI is between $20,000 and $31,000, 20% if the AGI is between $18,500 and $20,000, and 50% if the AGI is $18,500 at most. These figures also apply to married filers who are nonetheless filing separately from their spouses.

If your filing status recognizes you as the head of a household, all aforementioned financial thresholds are exactly one and a half times as high as they are for single filers. This makes the credit rate for any contribution to one's IRA 0% if his or her AGI for 2017 is greater than $46,500. The credit rate bracket that is valued at 50% encompasses the first $27,750 AGI window, the 20% credit rate bracket resides within the remaining $2,250 between the previous value and $30,000, and the 10% credit rate bracket spans the space between $30,000 and $46,500.

Finally, all AGI thresholds that would pertain to single filers are doubled for married taxpayers filing jointly. If the AGI for 2017 is above $62,000 in this case, the credit rate is 0%. The 10% credit rate bracket lies between that figure and $40,000, the 50% credit rate bracket stretches from $0 to $37,000, and the 20% credit rate window occupies the small space between $37,000 and $40,000.

According to studies, roughly two out of every three persons in the United States are unaware that Saver's Credit even exists, and this credit can actually be continually accrued up until the 17th of April of this year so long as one continues to make contributions. The complex tax-filing process makes claiming this generous credit with Form 8880 particularly challenging for inexperienced taxpayers, so using the IRS's Free File software to claim Saver's Credit is highly recommended.