How to Get a Head Start on Saving
Saving for retirement can be a daunting task, especially if you’re on a tight budget. However, there is good news for those who fall into the low and middle-income brackets – you may be eligible for a significant tax credit that can help kickstart your retirement savings. Known as the Saver’s Credit, this tax credit is designed to encourage individuals to begin building their retirement nest eggs.
The Saver’s Credit allows eligible taxpayers to claim a credit of up to $1,000 for single filers or $2,000 for married couples who file jointly. The credit is calculated based on a percentage of the first $2,000 ($4,000 for joint filers) contributed to retirement accounts such as 401(k)s, traditional IRAs, and Roth IRAs. The percentage can range from 10 percent to 50 percent, with the lower your income, the higher the percentage of retirement plan contributions you’ll get back on your tax return.
For the 2023 tax year, the income thresholds for eligibility are as follows: single filers and married people filing separately with adjusted gross income (AGI) of $36,500 or less, married couples filing jointly with AGI of $73,000 or less, and head-of-household filers with AGI of $54,750 or less. It’s important to note that individuals under the age of 18, full-time students, and anyone claimed as a dependent on someone else’s tax return are not eligible for the Saver’s Credit, regardless of their income.
One of the benefits of the Saver’s Credit is that it provides a dollar-for-dollar reduction in your tax bill, making it more valuable than a deduction. However, it’s essential to keep in mind that the Saver’s Credit is non-refundable. This means that you cannot claim it for more than the amount of tax you owe. So, if you owe $500 in taxes and qualify for a $750 Saver’s Credit, your tax bill will be wiped out, but you won’t receive a $250 refund.
To claim the Saver’s Credit, you’ll need to calculate your credit on Form 8880 and report the amount on your federal Form 1040. Make sure to attach Form 8880 when you file your return.
Exciting changes are on the horizon for the Saver’s Credit, thanks to legislation enacted in late 2022. Starting in 2027, eligible taxpayers will receive matching contributions directly deposited into a 401(k) or traditional IRA. Roth IRAs will not be eligible for these matching contributions. The match will equal 50 percent of the first $2,000 contributed to eligible retirement accounts and will not count toward the annual contribution limit. This means that even if you have already maxed out your contributions for the year, you can still benefit from the matching funds.
Furthermore, the matching contribution will be refundable, which means taxpayers won’t lose any part of the match if their tax liability is less than the amount allowed for the match. However, it’s worth noting that matching contributions of less than $100 will be applied against the individual’s tax liability rather than deposited into a retirement account.
There will be a phase-out period for the match based on income thresholds. For single taxpayers, the phase-out range will be between $20,500 and $35,500 AGI, while joint filers with AGI between $41,000 and $71,000 will also see a phase-out of the match. These income thresholds will be adjusted annually for inflation starting in 2028.
These changes to the Saver’s Credit are set to make it even more valuable for individuals looking to save for retirement. The ability to receive matching contributions directly into retirement accounts, along with the refundable nature of the match, will provide a significant boost to individuals’ retirement savings.
So, if you’re on a tight budget but want to start saving for retirement, be sure to explore the Saver’s Credit. It could be the head start you need to build a comfortable nest egg for your future. Start by calculating your credit on Form 8880 and make the most of this valuable opportunity.
[Note: Rocky Mengle is a contributing writer at Kiplinger.com. For more on this and similar money topics, visit Kiplinger.com.]
