Struggling With Retirement Savings? Uncle Sam May Give You Extra Credit
Dear Carrie: I work for a small nonprofit. I love my job but don't make a lot of money, so saving for retirement is hard. The company offers a retirement plan that I contribute to, but there's no match. How can I save more? -- A Reader
Dear Readers: This is a great question -- and a great time to be asking it. With the challenges of the past year still fresh and people struggling to get back to some sort of normal, saving money is on everybody's mind, whether it's for planned expenses, an emergency fund, retirement or all of the above. On the positive side, Americans on average have been saving more, with personal savings rates the highest they've been in years. However, for a lot of folks, saving -- especially for retirement -- is an ongoing challenge.
So, I'm happy your question gives me the chance to talk about a benefit from Uncle Sam that few people are aware of: the Saver's Credit -- a special tax break for low- to moderate-income taxpayers who are specifically saving for retirement. And with April 15 just ahead, there's still time to take advantage of it for this tax year. Here's how it works.
What It Does
The Saver's Credit gives you a tax credit of 50%, 20% or 10% on the first $2,000 in contributions you make to a retirement account. The percentage you get depends on your adjusted gross income (AGI) and filing status, but you could potentially claim a credit of up to $1,000 -- or up to $2,000 if you file jointly with your spouse. You might think of it as a retirement match from the government.
The Saver's Credit is applied directly to your tax bill to reduce the amount of income tax you owe. For instance, if your tax bill is $1,000 and your credit is $400, you'd only owe $600. If your tax bill is $1,000 and your credit is $1,000, it's a wash. You'd owe nothing.
What if your tax bill is $500 and your credit is $1,000? Unfortunately, you'd only get the $500 applied to your bill. The Saver's Credit is nonrefundable, meaning if your credit is larger than your bill, you don't get the difference.
How You Qualify
To meet the AGI requirements and qualify, you must be 18 or older, not a full-time student and not claimed as a dependent on someone else's tax return. (AGI is your gross income minus adjustments such as deductible retirement contributions, self-employment taxes, educator expenses and student loan interest.)
To qualify for a 50% credit when filing your taxes for 2020, a single filer's AGI can't be more than $19,500. The AGI limit for a 20% credit is $21,250. For a 10% credit, it's $32,500. The AGI limits for married filing jointly are $39,000, $42,500 and $65,000, respectively. These income limits are due to go up in 2021.