Low- and moderate-income workers who save for retirement in a 401(k) plan, individual retirement account or myRA could qualify for the saver's credit. This valuable tax credit can be claimed in addition to any tax deduction you earn by contributing to a traditional retirement account. Here's how to qualify for the saver's credit on your 2016 or 2017 tax return.
Check the income requirements. Individuals with an adjusted gross income of up to $30,750 in 2016 or $31,000 in 2017 could qualify for the saver's credit if they contribute to a retirement account. "If you're single and earning $20,000, people in that income level have a hard time saving for retirement," says Gil Charney, director of The Tax Institute at H&R Block. "It's difficult pragmatically to be able to make these kinds of savings decisions, but if you can, it is a very good deal." Heads of household have a higher saver's credit income threshold of $46,125 in 2016 and $46,500 in 2017. Married couples can earn as much as $61,500 in 2016 and $62,000 in 2017 and remain eligible for the saver's credit.
Save in a qualifying account. There are several types of retirement accounts that might qualify you for the saver's credit. Contributing to a 401(k) plan will often allow you to claim the saver's credit. Other types of eligible workplace retirement accounts include 403(b) plans for employees of public schools, 457 plans for state or local government employees, SEP or SIMPLE plans sometimes used by smaller employers and the federal government's Thrift Savings Plan. But you don't necessarily need a workplace retirement account to qualify for the credit. Contributions to a traditional IRA, Roth IRA or the Treasury Department's new myRA could also make you eligible for the saver's credit.
[Read: 5 New 401(k) and IRA Rules for 2017.]
Contribute enough for the full credit. The saver's credit can be claimed on retirement account contributions of up to $2,000 for individuals and $4,000 for couples. However, distributions from your retirement account might reduce the amount that is used to calculate the credit.
Meet the contribution deadline. Contributions to 401(k) plans and similar types of workplace retirement accounts that might qualify for the saver's credit are typically due by the end of the calendar year. However, you have until the due date of your tax return in April to make an IRA contribution that counts toward the saver's credit. So retirement savers have until April 18, 2017, to make a traditional IRA, Roth IRA or myRA contribution that makes them eligible for the saver's credit on their 2016 tax return.
26 tips for enjoying retirement on a reduced income:
Don't expect a large credit. The saver's credit could reduce the income tax you owe or boost your refund. "The saver's credit is better than a deduction," says Mark Steber, the chief tax officer for Jackson Hewitt Tax Service. "It's reduced tax liability or money back on your tax return." The maximum possible credit is $1,000 for an individual or $2,000 for a married couple. However, most people receive smaller credits. "It is often much less and, due in part to the impact of other deductions and credits, may, in fact, be zero for some taxpayers," according to a statement from the IRS.
The saver's credit was claimed on 7.9 million income tax returns in 2014, and the government paid out nearly $1.4 billion for this retirement savings incentive. However, most workers don't know about the tax savings they could be eligible for by claiming the saver's credit. Only a third of workers say they are aware of the saver's credit, but that's up from a quarter in 2012, according to a 2016 Transamerica Center for Retirement Studies online survey of 4,161 workers at for-profit companies with 10 or more employees. Millennials (38 percent) are more likely to know about the saver's credit than members of Generation X (30 percent) or baby boomers (29 percent), the survey found.
Dependents and students are not eligible. People who are under age 18 or claimed as a dependent on someone else's tax return are not eligible for the saver's credit. Those who are enrolled as a full-time student for five or more months during the calendar year cannot take the credit either, including students at technical, trade and mechanical schools. However, taking online courses or participating in on-the-job training will not prevent you from claiming the saver's credit.
Calculate your credit. The saver's credit is worth 10, 20 or 50 percent of your retirement account contributions, with employees with the lowest income getting the biggest credit. Retirement savers with an adjusted gross income of $18,500 or less ($37,000 for couples) in 2017 are eligible for a saver's credit equivalent to half of their retirement account contributions. Workers earning slightly more than those income cutoffs are eligible for a 20 percent saver's credit. And investors earning between $20,001 and $31,000 ($40,001 to $62,000 for couples) could get a saver's credit worth 10 percent of their 401(k) or IRA deposit. The saver's credit can be claimed in addition to the tax deduction for saving in a traditional retirement account. "There are only a limited number of instances in the tax law that let you double time," says Barbara Weltman, an attorney and author of "J.K. Lasser's 1001 Deductions and Tax Breaks 2017." "You are getting the deduction for the IRA contribution, and you may get a tax credit as well."
Emily Brandon is the author of "Pensionless: The 10-Step Solution for a Stress-Free Retirement."