The Little-Known Retirement Match You Can't Afford to Miss
To give people an incentive to boost their retirement savings, many employers offer matching contributions for 401(k) plans. But the best match ever doesn't come from any employer. Instead, it comes straight from the U.S. government in the form of the Retirement Savings Contributions Credit, or more simply, the Saver's Credit. For those who qualify, the rewards from participating are simply too good to pass up.
The Saver's Credit: Matching on Steroids
Many companies offer matching contributions to persuade employees to participate in their employer-sponsored retirement plans. A typical scenario involves you receiving a matching contribution equal to half of whatever you contribute, up to 6 percent of your salary. So if you make $30,000 a year and set aside $150 each month to your 401(k) plan, your employer will add $75 in an employer match, adding $900 over the year.
Employer matching is a useful way to get a bigger retirement nest egg. But regardless of whether or not you get matching contributions in your 401(k) -- or even if you don't have access to a 401(k) plan at all -- the Internal Revenue Service offers a tax credit that can give you an even sweeter deal.
The Retirement Savings Contributions Credit allows you to have up to $2,000 in contributions to an individual retirement account, 401(k) or similar retirement plan matched with a tax credit. Low-income taxpayers with adjusted gross income of $18,000 or less for single filers or $36,000 or less for joint filers can get 50 percent of their contribution -- as much as $1,000 -- back in the form of a credit. Those who make as much as $30,000 for singles or $60,000 for joint filers can get a smaller credit of 10 percent or 20 percent. Those income thresholds will go up slightly for 2015 contributions, rising by $250 and $500 for the 50 percent credit and by $500 and $1,000 for the smaller credits.
Moreover, if you're married, each spouse can take advantage of the Saver's Credit. All told, a family can therefore get up to $2,000 in credits for making $4,000 in contributions.
Even better: You can receive the Saver's Credit on top of any employer match.
Shortcomings of the Saver's Credit
Only those who are 18 or older are eligible for the credit, and anyone who's a full-time student or who gets claimed as a dependent on someone else's tax return doesn't get to claim the credit.
The Saver's Credit is a nonrefundable tax credit. That means that if you already have zero tax liability, you can't use the credit to get a refund check from the IRS. Moreover, you can't carry the credit forward or backward to other tax years. That's particularly a problem for many low-income workers at whom the Saver's Credit is primarily targeted, because their tax rates tend to be extremely low, and they often are eligible for other tax breaks that can already reduce their total liability to zero.
Nevertheless, if you're eligible and you have a big enough tax bill to make it worthwhile, the Retirement Savings Contributions Credit is one of the most lucrative tax benefits you'll ever get. Those who are entitled to receive the Saver's Credit shouldn't miss out on the opportunity to do so, even if it takes some extra effort to put money aside for your retirement.
Motley Fool contributorDan Caplingerloves every tax break he can get his hands on. You can follow him on Twitter@DanCaplingeror onGoogle+. To read about our favorite high-yielding dividend stocks for any investor, check outour free report.