Saver's Credit Can Help You Save for Retirement

Low- and moderate-income workers can take steps to save for retirement and earn a special tax credit. 

The saver’s credit helps offset part of the first $2,000 workers voluntarily contribute to traditional or Roth Individual Retirement Arrangements (IRAs), SIMPLE-IRAs, SEPs, 401(k) plans, 403(b) plans for employees of public schools and certain tax-exempt organizations, 457 plans for state or local government employees, and the Thrift Savings Plan for federal employees. Also known as the retirement savings contributions credit, the saver’s credit is available in addition to any other tax savings that apply.

2008 Credit Still Available for IRA Contributions – Unlike other workplace retirement plans, IRA contributions can be set up and funded after the end of the year.  Thus, eligible workers still have time to make qualifying IRA contributions and get the saver’s credit on their 2008 tax return. People have until April 15, 2009 to set up a new IRA or add money to an existing IRA and still get credit for 2008. 

Taxpayers with 401(k), 403(b), 457 and Government Thrift plans who were unable to set aside money for 2008 may want to schedule their 2009 contributions soon, so that their employer can begin withholding them in January.

The saver’s credit can be claimed by:

• Married couples filing jointly with incomes up to $53,000 in 2008 or $55,500 in 2009;

• Heads of Household with incomes up to $39,750 in 2008 or $41,625 in 2009; and

• Married individuals filing separately and singles with incomes up to $26,500 in 2008 or $27,750 in 2009.

Like other tax credits, the saver’s credit can increase a taxpayer’s refund or reduce the tax owed. Though the maximum saver’s credit is $1,000 ($2,000 for married couples), taxpayers are cautioned that 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.

A taxpayer’s credit amount is based on his or her filing status, adjusted gross income, tax liability and amount contributed to qualifying retirement programs.

In tax-year 2006, the most recent year for which complete figures are available, saver’s credits totaling almost $900 million were claimed on nearly 5.2 million individual income tax returns.  Saver’s credits claimed on these returns averaged $213 for joint filers, $149 for heads of household and $128 for single filers.

The saver’s credit supplements other tax benefits available to people who set money aside for retirement.  For example, most workers may deduct their contributions to a traditional IRA.  Though Roth IRA contributions are not deductible, qualifying withdrawals, usually after retirement, are tax-free. Normally, contributions to 401(k) and similar workplace plans are not taxed until withdrawn.

Other special rules that apply to the saver’s credit include the following:

• Eligible taxpayers must be at least 18 years of age.

• Anyone claimed as a dependent on someone else’s return cannot take the credit.

• A student cannot take the credit. A person enrolled as a full-time student during any part of 5 calendar months during the year is considered a student.

• Certain retirement plan distributions reduce the contribution amount used to figure the credit. For 2008, this rule applies to distributions received after 2005 and before the due date (including extensions) of the 2008 return. 

Started in 2002 as a temporary provision, the saver’s credit has since been made a permanent part of the tax code.

If you have questions on how this tax benefit might apply to your situation, please give this office a call.

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