How to Get the IRS to Pay You to Save!

How to Get the IRS to Pay You to Save!

Were you aware of a little-known tax credit called the Saver’s Credit?  Low income workers who save for retirement using a 401(k), IRA, or Roth can earn a tax credit worth up to $1,000 for individuals and up to $2,000 for couples.  Formally known as the Retirement Savings Contributions Credit, this tax credit was first added to the tax code in 2002 as a temporary provision, and was then made permanent in 2006.

The saver’s credit can be claimed by workers whose modified adjusted gross incomes are below $28,750 for singles and $57,500 for married couples.  Up to 50% of the first $2,000 contributed to an IRA, 401(k), or similar workplace retirement account – depending on your AGI – can be used to increase your tax refund or reduce the tax you owe.  This tax credit is available in addition to the tax deferral you get for making a traditional 401(k) and IRA contribution and any 401(k) match you get from your employer.

As an example, a married couple earning $30,000 in 2012 and contributing $1,000 to an Roth IRA will be able to claim a $500 tax credit for that $1,000 Roth contribution.  Not bad!

According to a Transamerica Center for Retirement Studies online survey of 4,080 workers in 2011, awareness of the saver’s credit is increasing, but remains low.  Just 21 percent of people earning less than $50,000 said they were aware of the saver’s credit.  But that’s up from 12 percent in 2010.

Workers under age 18, full-time students, and individuals claimed as dependents on someone else’s tax return are not eligible for the credit.  In addition, if you took a distribution from a retirement account, such as for a Roth conversion, your eligible contributions will be reduced by the amount of the distribution.

In order to take advantage of this tax credit, contributions must be made to a 401(k), 403(b), 457, or Thrift Savings Plan by the end of the calendar year.  However, you have until April 15, 2013 to add money to an IRA or Roth and still qualify for the credit for your 2012 taxes.

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