75 Percent of Eligible Households Ignore This Retirement Tax Credit

You might be able to reduce your next income tax bill by thousands of dollars, thanks to an unheralded federal tax break.

75 Percent of Eligible Households Ignore This Retirement Tax Credit Photo by Elnur / Shutterstock.com

In less than six months, it will be income-tax season again. And as in years past, millions of taxpayers likely will miss the opportunity to slash their tax bill by up to $2,000 simply because they overlook a little-known federal tax break.

According to the Internal Revenue Service, the Saver’s Credit is worth 10 percent, 20 percent or even 50 percent of your retirement plan contributions up to $2,000 (or $4,000 for married people filing joint tax returns).

And yet, just 25 percent of workers in households that earn less than $50,000 are even aware of this credit, according to a survey by the Transamerica Center for Retirement Studies.

Your eligibility for the credit — and the size of the break you will receive — depends largely on your income and tax filing status, however. To be eligible for the Saver’s Credit, you must:

  • Be an adult who is not a full-time student and not claimed as a dependent on someone else’s tax return.
  • Have an adjusted gross income of no more than $31,500 (or $63,000 for married people filing jointly; or $47,250 for people filing as heads of household).
  • Contribute to a certain type of retirement plan (see below).

The percentage of your retirement contributions eligible for the Saver’s Credit also depends on your income. Click the IRS link above for a breakdown.

Contributions to various types of retirement plans are eligible for the Saver’s Credit:

  • Traditional IRA
  • Roth IRA
  • 401(k)
  • SIMPLE IRA
  • SARSEP
  • 403(b)
  • 501(c)(18)
  • Governmental 457(b) plan

Failing to take advantage of such tax breaks is No. 1 among the “5 Blunders You’re Making When Investing for Retirement.” As we explain:

Putting your retirement money in a nonretirement bank account, CD or brokerage account isn’t going to cut it. These options all share a glaring weakness: They offer no tax advantages to the saver.

For more tips about saving for retirement, check out:

Have you heard of the Saver’s Credit before? Let us know below or on Facebook.

Karla Bowsher
Karla Bowsher
I’m a freelance journalist and former newspaper reporter who has covered both personal and public finance. I've worked for a top 50 major metro daily and a community newspaper as well as ... More

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