Get a $1,000 Retirement Match From the IRS

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Vitaliy Pakhnyushchyy
Saving for retirement is important, but it's also a challenge for most people. When you're struggling to make ends meet right now, finding extra money to set aside for years or even decades seems like a luxury you can't afford. To get more people to think ahead financially, one little-known tax law actually puts money back in your pocket when you make a contribution to an IRA, 401(k) or other retirement plan. With the potential to get as much as $1,000 back from the government via the Retirement Savings Contributions Credit, more commonly referred to as the Saver's Credit, you can't afford not to get moving with your retirement savings.

Using the Saver's Credit

The Saver's Credit is designed to get those with relatively low incomes to save more for retirement by providing a matching incentive. Depending on the amount of income you earn, the credit is equal to 10 percent, 20 percent or 50 percent of the first $2,000 you contribute to a qualifying retirement account. The credit percentage depends on what your gross income is, with higher credits available for lower-income earners. For the 2014 tax year, single filers earning $18,000 or less and joint filers with earnings of $36,000 or less qualify for the maximum 50 percent credit amount. Singles with earnings of $19,500 to $30,000 and joint filers who have incomes of $39,000 to $60,000 get the lower 10 percent credit, while those in the middle qualify for a 20 percent credit rate.

The net impact of the Saver's Credit is that if you save $2,000, you can get a credit back for as much as $1,000. If you file jointly, then both spouses can take the credit if they each make retirement contributions, bringing the family maximum up to $2,000.

The best thing about the Saver's Credit is that it's available on top of any matching that your employer might give you. So if you contribute $2,000 to your 401(k) and your employer provides a one-for-one match to add to your account, the credit will still be yours to keep. You can also still participate for 2014, as you can turn back the clock on an IRA contribution through April 15 into the 2014 tax year and claim the credit on the return you're about to file.

Why the Saver's Credit Might Not Work for You

Obviously, if your income is above the income limits for eligibility, then you won't be able to take advantage of the Saver's Credit. You also have to be 18 or older and not be a full-time student.

There's also one potential trip-up that even those who are eligible might find troublesome. The amount of the Saver's Credit is limited to the amount of tax liability you owe, and so you can't use it to get a refund above and beyond whatever you might have had withheld from your paychecks for income taxes. That's because the Saver's Credit is what's known as a nonrefundable credit. That can be a problem for low-income taxpayers, who typically don't owe a lot of tax in the first place.

The good news, though, is that refundable credits such as the Earned Income Tax Credit don't count against what you can claim for the Saver's Credit. Even if your tax picture doesn't let you claim the entire $1,000, you can still get whatever partial amount you might qualify to receive.

The Saver's Credit is essentially free money in your pocket to save for retirement. If you qualify, it makes sense to do everything you can to take advantage of the credit and start contributing to a retirement account right away.

Motley Fool contributor Dan Caplinger won't get a Saver's Credit this year, but he's still saving for retirement. You can follow him on Twitter @DanCaplinger or on Google+. Check out our free report on one great stock to buy for 2015 and beyond.
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