The IRS is offering tax credits for retirement savings.
With the typical American worker expected to spend anywhere from 20 to 30 years in retirement, there are many factors to consider regarding retirement savings. No one wants to be left without money for their retirement, but many people are unprepared or uninformed when it comes to their retirement savings amount.
Retirement Confidence Survey
Recently revealed in the 2016 Retirement Confidence Survey, up to 30 percent of workers who were able to contribute to plans such as a 401(k) chose not to participate. The workers who did elect to save for retirement, over half had less than $25,000 and a quarter had less than $1,000.
Not surprisingly, retirement confidence is directly related to the participation rate in a retirement plan. No matter what type of plan—a defined contribution (DC), defined benefit (DB), or individual retirement account (IRA)—workers who contributed to some type of DC, IRA, or DB were twice as likely to be very confident about their retirement income.
The survey also discovered that more than half of working Americans have no idea how much they need to save in order to retire. Factors such as early retirement due to illness, layoffs, or taking care of a spouse can leave a retiree with a much different retirement experience than what they expected. Saving and planning for retirement is vital to living comfortably during the later years of life. In order to help workers become motivated to save for retirement, the IRS has incentives toward saving for retirement such as tax credits.
IRS Tax Credits
The limits for the current year have stayed the same as in 2015 and 2016, with a 401(k), 403(b), and many government plans cap out at $18,000 in one year, with a catch-up contribution of $6,000 for workers 50 and older. When employers match the 401(k) contribution amounts, the maximum amount that can be contributed every year rose to $54,000. Contributions not covered by a retirement plan can be deducted for a traditional IRA with employer matching up to $5,500 and $1,000 for any catch-up amounts for those 50 and older.
However, the IRS has set income limits pertaining to workers who are able to contribute to a retirement plan at work and a traditional IRA. For those who have spouses that have access to a workplace plan, there are also limits. In addition, there are income limits for those who contribute to Roth IRAs.
For those who fall in the middle and low income earning range, contributions of up to $2,000 toward an IRA or retirement plan in 2016 or 2017 could qualify for a Saver’s Credit. The income limits based on Adjusted Gross Income (AGI) are as follows:
|2017 Savers Credit|
|Credit Rate||Married Filing Jointly||Head of Household||Single Filer|
|50 percent||AGI<$37,000||AGI<$27,750||AGI<$18, 500|
|20 percent||$37, 001-$40,000||$27,751-$30,000||$18,501-$20,000|
Started in 2002 as a temporary provision, legislation made the saver’s credit a permanent part of the tax code in 2006. Each year, the income limits are adjusted to reflect inflation.
The Saver’s Credit allows the low-to-moderate income workers the ability to save two ways for the same dollar amount. With this special saver’s credit, workers can save for their retirement and on their taxes at the same time. There are six tips the IRS states that everyone should know about the saver’s credit:
- Saving for retirement – The saver’s credit is actually referred to as the retirement savings contributions credit. This credit helps to offset the first $2,000 workers for those who fall under certain income limits.
- Saving on taxes – The saver’s credit can decrease the amount of tax owed or increase the amount of refund received. With the current maximum credit at $1,000 for a single person or $2,000 for a married couple, the credit a person normally receives is often much less because of deductions and credits claimed.
- Saving for next year – For those who were unaware of this credit in 2016, a new IRA can be set up until April 15, 2017. If an IRA already exists, money can be added for the previous year. Setting up recurring deposits into an IRA is advisable for the upcoming year if possible.
- Special rules – There are some special rules that exempt particular individuals from contributing to a retirement plan. They include those younger than 18 years of age, those who were a full-time student the previous year, and those who cannot be claimed as a dependent on another person’s tax return.
- Credit amount – To figure the amount of credit based on the individual’s filing status, the adjusted gross income, tax liability, and a number of contributions that qualify, refer to the information page at IRS.gov.
Final Thoughts about Retirement
No matter how much an individual makes, saving for retirement should be considered by everyone in the workforce. For those who are in the low-to-moderate income bracket, serious consideration should be made towards monthly contributions to an IRA or workplace retirement plan.
Taking the time to learn and understand the retirement plan tax credits for the upcoming tax year will benefit all those who decide to contribute. Employer matching, saver’s credits, and increased tax return amounts are just a few of the incentives given to those planning for retirement. Consider all future goals and embark on a financial check-up which includes retirement planning.