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The ‘Free’ Retirement Money Many Overlook

People often talk about the significance of the “free” money associated with the company match in retirement savings – but there’s another source of “free” money that is often overlooked.

I’m talking about the so-called Saver’s Credit, more precisely the Retirement Savings Contributions Credit. It’s a credit, not a deduction – a dollar-for-dollar reduction of tax liability.

Income Limits

For those who qualify, in addition to the customary benefits of workplace retirement savings, it could mean a $1,000 break on their taxes — twice that if married and file a joint return. In fact, for a moderate income saver, it can offset 50%, 20% or 10% of retirement plan or IRA contributions up to $2,000 ($4,000 if married filing jointly), depending on adjusted gross income.

Speaking of which, the Saver’s Credit can be claimed by:

  • married couples filing jointly with incomes up to $61,500 in 2016;

  • heads of households with incomes up to $46,125 in 2016;

  • married individuals filing separately; and

  • singles with incomes up to $30,750 in 2016.

Additionally, in order to claim the credit, individuals must be 18 years or older, must not be a full-time student, and cannot be claimed as a dependent on another person’s return.

5 Things You May Not Know

Here are five things you may not know about the Saver’s Credit:

  • It applies to a variety of retirement savings. The Saver’s Credit can be taken for contributions to a traditional or Roth IRA (including myRA), a 401(k), SIMPLE IRA, SARSEP, 403(b), 501(c)(18) or governmental 457(b) plan, as well as voluntary after-tax employee contributions to qualified retirement and 403(b) plans.

  • There are two deadlines for contributions. To qualify for the Saver’s Credit, contributions must be made to 401(k)s, 403(b)s, 457s or the federal government’s Thrift Savings Plan by the end of the calendar year. However, taxpayers have until April 18, the due date for filing a 2016 tax return, to set up a new individual retirement arrangement or add money to an existing plan for 2016.

  • Rollover contributions aren’t eligible for the Saver’s Credit. Eligible contributions may be reduced by any recent distributions (for 2015, distributions received after 2012, and before the due date of the 2015 return, including extensions) from a retirement plan or IRA (a list of these distributions is available here.)

  • You have to file Form 1040, Form 1040A, or Form 1040NR to claim the credit. The Saver’s Credit is (still) not available via the 1040-EZ form (though there have been legislative attempts to remedy that situation). However, if you use tax software, such as TaxAct or TurboTax, it should calculate the credit for you if you report your retirement contributions. Look for a completed Form 8880 in the attachments that your tax software provides.

  • You only get the credit if you file for it. Just 24% of American workers with annual household incomes of less than $50,000 are aware of the credit, according to the 15th Annual Transamerica Retirement Survey.

However, it’s not too late to save and get “credit” for doing so – make sure the participants you work with, and plan sponsors you work for – are aware.

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