Many lower-income families can benefit significantly from a little-known tax break – if they can scrape together some money to save for retirement. The Saver’s Credit isn’t widely known or discussed in the financial media. But along with the Earned Income Tax Credit, it’s one of the most valuable tax breaks out there for lower-income Americans. The Saver’s Credit may mean a direct credit of as much as $2,000 off a married couple’s federal tax bill, and $1,000 for an individual taxpayer.
If your income is below the IRS threshold (just increased for 2020), all you have to do is contribute to any of these types of retirement accounts:
- Traditional IRA
- Roth IRA
- SIMPLE IRA
Your tax credit will be worth anywhere from 10% to 50% of your retirement contribution, if you meet these qualifications:
- Your adjusted gross income is $65,000 or less, and your tax-filing status is married filing jointly, OR;
- Your adjusted gross income is $48,750 or less, and your tax-filing status is head of household, OR;
- Your adjusted gross income is $32,500 or less, and your tax-filing status is single, married filing separately, or qualifying widow(er).
Additionally, you must be age 18 or older, not a full-time student, and not claimed as a dependent on someone else’s tax return.
The maximum contribution amount that may qualify for the credit is $2,000 ($4,000 if married filing jointly), making the maximum credit $1,000 ($2,000 if married filing jointly).
Rollover contributions (money that you moved from another retirement plan or IRA) aren’t eligible for the Saver’s Credit. Also, your eligible contributions may be reduced by any recent distributions you received from a retirement plan or IRA.
Provisions for ABLE Accounts
If you have an ABLE account – a special kind of account designed for people with disabilities so they can save money without jeopardizing their ability to qualify for need-based government disability benefits, the Saver’s Credit can be taken for your contributions to an ABLE account — if you’re the designated beneficiary.
Rollover contributions (from another ABLE account or from a Qualified Tuition Plan (QTP) account do not qualify for the credit. Also, your eligible contributions may be reduced by any recent distributions you received from your ABLE account.
The Saver’s Credit can be taken for your contributions to an ABLE account if you’re the designated beneficiary.
Rollover contributions (money that you moved from another ABLE account or from a Qualified Tuition Plan (QTP) account do not qualify for the credit.
For more details on the Saver’s Credit from the IRS, click here.
If you have lower income loved ones who may benefit from this tax break, this could be an opportunity to maximize a family gifting strategy. As of 2020, you can gift up to $15,000 per person without tax consequences for the recipient. Married couples can gift up to $30,000 per person). This money is not taxable and is not counted against the income limit. So if your loved one has enough earned income during the year, can take up to $2,000 or $4,000 in gift money and contribute it to a retirement plan, that gift can be magnified by the amount of the tax credit.
It could be a good way to get young people in their lower-income-earning years a jumpstart on their retirement savings, or a way to help loved ones in lower-income professions a leg up.
The saver’s credit may also be helpful to anyone whose income is artificially low in a given year. For example, for someone who served almost all year in a combat zone qualifying for tax-free treatment of military pay, or who is taking time off work to care for an elderly or handicapped family member.
About American IRA, LLC
American IRA, LLC is a leading third-party administrator of self-directed retirement plans for individuals and small businesses. Our offices are in Asheville and Charlotte, North Carolina and Atlanta, Georgia, but we work with investors all across the United States by helping them combine the benefits of tax-advantaged retirement accounts with the flexibility to invest in non-traditional asset classes not normally available from most investment companies.