Most of us know that the earlier we start saving for retirement, the better. Savvy savers will even max out their contributions and open multiple types of savings accounts to take full advantage of the many retirement options available to them. But even workers who take every reasonable measure to maximize their retirement savings often overlook one simple way to save: the Retirement Savings Contribution Credit. If you have never heard of this, that’s okay.
You’ve probably been focusing on working and saving, and those are things to be proud of. So prepare to be pleasantly surprised. There is actually a type of tax credit that rewards you for working hard and saving towards your eventual retirement. The Retirement Savings Contribution Credit is a wonderful tool that you can use to save on your taxes and put some of your hard-earned money back into your pocket. It is a type of gift, but not from a kind family member or Santa Claus.
This gift comes from a far less expected source: Uncle Sam. Are you skeptical? Don’t be. Smart taxpayers have been taking advantage of this tax credit for decades, and with just a little bit of information and a few minutes of filling out forms, you can join their ranks.
What Is the Retirement Savings Contribution Credit?
The Retirement Savings Contribution Credit, better known as the Saver’s Credit, is one of those rare times that our friends at the IRS reward us for planning ahead. The Saver’s Credit is something that is available to anyone who contributes to a qualified retirement account, whether it’s an IRA, 401k, Traditional, Roth, self-directed, or any combination of the above. There are some technicalities to be aware of, but it’s a popular and highly effective way to limit your liabilities come Tax Season.
Who Can Receive the
Saver’s Credit and What Is Its Purpose?
The purpose of the Retirement Savings Contribution Credit is to encourage Americans to save for retirement. It can be helpful to view it as a little reward for being responsible enough to plan for your retirement. But as far as tax credits go, this is one of the easiest ones to obtain. It also happens to be a valuable credit. If you are single or married and filing taxes separately from your spouse, you may be eligible for up to $2,000 in savings. If you are married and filing jointly, you and your spouse could receive up to $4,000. The major requirements are that you are at least 18 years of age, working and not meeting the IRS’s definition of a full-time student, and filing taxes independently. If you are declared as a dependent on another person’s taxes, you will not be eligible. Provided you meet those criteria, you will likely be able to receive some or all of the possible credit.
The Saver’s Credit was initially created to incentivize lower-income individuals to save for retirement. Even the U.S. Government acknowledges that it is more difficult for those with a low income to save, so this is a credit designed to make saving easier for the average working people. So, if you are a high-earning individual, you may not be eligible. Eligibility for the credit is based on your adjusted gross income. You can quickly calculate your adjusted gross income by subtracting your deductions from your gross (or total) income. AGI is simply another way of referring to the money you actually pay taxes on. When you calculate your taxes online, as most Americans do, it is typically done automatically. While the income limits for who can take advantage of the Saver’s Credit change annually, the IRS website will always list the most current information. Your eligibility and how much you can earn and still qualify for the credit will depend on your marital and filing status. Here are the limits for 2018:
Do you meet those criteria? If so, congratulations. You most likely have a tax credit available to you. Naturally, you’re probably wondering how you sign up to get your little gift from Uncle Sam. Don’t worry, because we have you covered. Follow the steps below and you’ll be well on your way to well-deserved savings.
How to Receive Your
Retirement Savings Contribution Credit
As with most transactions involving the IRS, you will have to fill out some forms to ensure you receive your Retirement Savings Contribution Credit. Before you begin, you will want to know how you intend to file your taxes. If you’re single, this part is easy. But if you are married, you will want to determine if you are filing jointly or separately. Married couples filing jointly will generally want to complete this process together. If you are filing separately, just ensure your spouse is also filing separately to avoid confusion.
Next, you will gather your paperwork. Any receipts you have from your retirement contributions will be helpful as will the tax documents you already have prepared. It may also be helpful to have a calculator handy because we want our numbers to be accurate. Once you have all of these items together, the actual process for claiming your credit should take under 20 minutes. To keep things simple, here are the four steps you will need to follow, along with some useful web resources for your reference.
Determine Your Eligibility
If you use an employer-sponsored IRA or 401k, these plans are always eligible. To benefit from the Saver’s Credit, you must have a qualified retirement plan. Fortunately, the IRS website has a handy-dandy list of the types of accounts that meet the requirements. Most types of accounts, even self-directed plans such as Solo 401ks, will qualify. Lesser-known plans like SIMPLE IRAs and plans for self-employed individuals also qualify.
If you use multiple types of accounts, you may be able to “count” contributions towards each account. There are some additional types of contributions and circumstances besides income that can disqualify you from enjoying the Saver’s Credit. For instance, one common error taxpayers make when calculating their savings is counting rollover contributions. Unfortunately, rollover contributions do not “count” towards the credit.
Fill Out Necessary and Appropriate Paperwork
You will need at least two forms to complete the application for your credit:
Form 8880 is the actual application for the Retirement Savings Contribution Credit. You will use your adjusted gross income to calculate the amount of credit you qualify for. Which form you use will depend on your filing status. Note that you may not use the “EZ” version of this form if you’re applying for the Saver’s Credit. The 1040/1040A is the form where you will enter the information you determined using Form 8880.
Double-Check Your Information
When in doubt, have a professional take a second look. Any Certified Public Accountant can help you verify your savings and eligibility as can any agency that you would normally use to help with tax preparation. One quick thing you can check on your own is the final number you write down on Form 1040/1040A. You will want to ensure your amount is not over the limit. If you calculated a figure higher than $2,000 for yourself individually or $4,000 for yourself and your spouse filing jointly, you made a mistake.
Claiming an inaccurate amount could mean you don’t get your credit at all, so you definitely want to check your figures and possibly get professional help if you find this is an issue. Fortunately, there are many free and inexpensive services that can assist you in making these calculations, particularly if you prepare your personal income taxes well ahead of April 15th. File your taxes as you normally would. Make sure you file on time, of course, and enjoy your savings! What you do with it is up to you, but if early retirement is a goal, you may consider re-investing your savings back into your retirement accounts.
In short, if you meet the eligibility requirements discussed above and are making any type of contribution to a qualified retirement plan, you should be taking advantage of the Retirement Savings Contribution Credit. How often in life do we get paid back out of our savings, particularly from Uncle Sam? The answer, in our experience, is very rarely. Your Retirement Savings Contribution Credit is there for the taking, so by all means, take it! But as a final note of caution, be sure you’re claiming what’s rightfully yours. If you have multiple plans, rollovers, or any of the factors that may make redeeming your tax credit more complicated, check with a qualified Certified Public Accountant or your personal tax preparer to ensure you’re requesting the correct amount from Uncle Sam. Once you have checked with your chosen professional, all you have to do is sit back, relax, and enjoy your savings.