So I was helping my son with his taxes, and I advised him to open a Roth IRA, because I told him he will like having tax free income in 35 or 40 years vs a small reduction in taxes now.
But as we were working through the tax prep program, I noticed the Retirement Savings Contributions Credit (also known as the Saver’s Credit). I didn’t even know this existed. But here is the interesting, and relevant part. For a single guy with Adjusted Gross Income of $20k to $30.75k, your tax credit is 10% of your IRA contribution. But if your AGI is between $18.5k and $20k, your credit is 20% of your contribution, and if your AGI is less than $18,500, then you get a tax credit of 50% of your contribution. I was really surprised to see that Roth IRA contributions qualify.
But as we know, only traditional IRA contributions reduce your AGI. My son’s 2016 AGI was $20,500 so if he makes a Roth IRA contribution of $3000 he will get a 10% tax credit, or $300. But I was playing around with some numbers, and if he makes a traditional IRA contribution of $2500 that will get his AGI down to $18,000. Now he can make a $500 Roth IRA contribution and his total IRA contribution ($3,000) will qualify for a 50% tax credit, of $1500. He probably doesn’t owe that much in taxes, but the point is, it will most likely be best for him to make a traditional IRA contribution to lower his AGI so he can qualify for a greater percentage tax credit. Something for your kiddos to consider if they are in a similar low income situation.
It is nice that Congress has provided this additional incentive for lower income folks to save for retirement, but I wonder how many are even aware of this?
Unfortunately, many eligible taxpayers don’t take advantage of this break because they don’t know about it. Indeed, a recent survey* shows that only 12% of American workers with annual household incomes of less than $50,000 are aware of the Savers Credit.
Never, ever heard of this. Wonder why this is not widely known? Not that just because I don’t know about it, that it’s not widely known. But if you guys hadn’t heard of it either, it sounds like a big secret.
Well, D doesn’t make any income, so she can’t take advantage of it, and fortunately S earns too much so he can’t either. I think a lot of folks who MIGHT qualify can’t afford to save unless they are still living well under their budgets (living like students tho they are done with school). They also might not have the time and patience to read all of this and try different scenarios.
That’s good to know, but I don’t think it really impacts very many people. How many individuals making $20K a year have $3000 to spare to put into an IRA in the first place?
@calmom, there are parents of people making $20k that might be willing to pay for it. I realize that’s not the intent, but i would consider it for my kids.
the reason it is not widely known is not may people making under $50k can afford the contribution. A person like NJres’s new college grad might be able to take it for the first year after graduation when he has a 1/2 year of income, but if he was really living off that $20k, paying rent, insurance, food, there just wouldn’t be much left for saving.
new college grad might not qualify for Saver’s Credit if he/she was a full time student for 5 mouths of 2016. but they can claim education credits if their income levels under the limits.