Saving is the cornerstone of financial security. Ask any financial advisor or simply the financially savvy person, and they’ll more ore less give the same advice: Save early and save often, and you’ll thank yourself later. That’s why you need to get to know the Savers Tax Credit.
And even though it’s challenging, the benefits of a thoughtful savings strategy only grow over time. Between compound interest and added time, the dollar difference between someone who starts saving for retirement at 25 vs. at 35 could be in the tens of thousands—or much more!
Sadly, saving is a lot easier when you have more expendable income, which not everybody has. Low and moderate-income folks simply have fewer dollars to spare, and investing them into retirement becomes a lot trickier when there are bills to be paid.
Fortunately, there’s a tax credit for that. Whether or not you’re a big saver, you deserve when it’s time to file your tax return. And at Edge Financial, we’re here to teach you about every tax deduction, tax credit, and tax-related piece of info you might possibly need when it’s time to file—even if you decide to hire us to prepare your taxes for you.
We’re here to walk you through the Savers Tax Credit.
The Savers Credit can really reward you for planning for the long financial road ahead. In this article, we’ll explain exactly what it is, who qualifies for it, and offer some additional info to help you take advantage.
About the Savers Credit, the IRS has this to say:
“You may be able to take a tax credit for making eligible contributions to your IRA or employer-sponsored retirement plan.”
Essentially, the Savers Credit gives you a benefit when you make qualified contributions to your retirement account. Unlike a tax deduction, which only reduces taxable income, a tax credit like this one subtracts money from your total tax bill.
So, if you make the right contributions to your retirement accounts and claim the Savers Credit, your tax bill will be lowered. So, how can you make sure you’ve actually qualified for it?
A lot more people qualify for the Savers Tax Credit than even realize it, but it’s a lot easier than some other tax credits to qualify.
Here are the basics, according to the IRS. You’re eligible if:
Easy enough, huh? It’s really not too difficult to be eligible for this credit. Of course, the tax credit doesn’t just apply to any savings account; you’ll need to have made contributions to a retirement plan.
These are the types of accounts that, well, count:
Keep in mind that not every contribution counts. For example, your rollover contributions that you may have moved from one IRA to another won’t be eligible. And if you’re taking any distributions from an IRA or retirement plan, your eligible contributions may be reduced accordingly.
The Savers Credit amounts to 50%, 20%, or 10% of your eligible contributions, depending on your adjusted gross income. The higher the income, the lower the percentage of your retirement contributions that will come back to you through the credit.
Additionally, the maximum contribution that qualifies for the credit is $2,000 (or $4,000 for those who are married but filing jointly), which means the most anyone can save with the Savers Tax Credit is $1,000—or $2,000 for joint filers.
The IRS breaks down all potential savings by income and filing status on its website, so we recommend checking there to see how much the Savers Credit could potentially save you on your tax bill.
Like all other things related to your taxes, your retirement contributions only count for a given tax year. So, if you wait until January 1st to make a contribution, it won’t help you on the tax return you file by April 15th.
If you’ve got some extra money lying around toward the end of the year, consider making an end-of-year retirement contribution. Depending on your total income, you may see up to 50% of that money back on your refund!
Saving for your retirement can be tough. And when you put your financial future first, you should be rewarded for your hard work. Now that you understand how you can deploy the Savers Tax Credit to your advantage, it’s time to rethink how your savings strategy can help you on your tax refund.
Or, we can do the thinking for you. Just get in touch today.