Take Control (and Credit) for Your Retirement
Few would argue that saving money is not a good thing, nor that there is anyone better suited to take control of your retirement future than yourself or a better time than the present to begin.
Americans, however, are notoriously poor savers and sadly Arkansas as a state ranks in the bottom five of all states in lack of personal savings.
Obviously there are many reasons for this, a major of these being, no doubt, the lower average personal income levels in the state compared to other states.
But did you know there are some very favorable tax benefits that can make saving money more financially feasible?
Chief among these is a nice tax credit that is available to most Arkansans. If you save for your retirement in certain ways, you may be eligible for a tax credit (we'll call it the Saver's Credit) worth up to $2,000.
For example, contributing to an employer-sponsored retirement plan at work, such as a 401(k) or 403(b) plan, could make you eligible for the credit.
Likewise, contributing to an Individual Retirement Account, or IRA, is qualified savings, including to a Roth IRA or even a traditional IRA that you elect to be treated as nondeductible.
The Saver's Credit is formally known as the Retirement Savings Contribution Credit, and it can be worth up to $2,000 for married couples filing a joint return or $1,000 for single taxpayers.
As with most tax benefits, there are conditions to be met to qualify.
For one thing, your filing status and the amount of your income affect whether you are eligible for the credit.
For 2015, you will be eligible for the credit if your filing status and income are:
- Single, married filing separately or qualifying widow or widower, with income up to $30,500
- Head of Household with income up to $45,750
- Married Filing Jointly, with income up to $61,000
You must also be at least 18 years of age to be eligible, and you cannot have been a full-time student nor claimed as a dependent on someone else's tax return.
Finally, you have to make the contribution to a qualified retirement plan by the due date of your tax return in order to claim the credit.
For example, to take the credit on your 2015 return, you have to make the contribution at some point either during 2015 or during 2016 up through April 15, the return due date for most people. If made in 2016, you will need to have designated it as a 2015 contribution.
The nice thing is, because it is a credit, the Saver's Credit directly reduces the tax you owe.
Unlike a tax deduction, which only reduces the amount of your taxable income upon which tax is calculated, this credit will reduce any tax you would otherwise owe dollar of dollar, making it much more valuable than a deduction.
If you prepare your own tax return, IRS Form 8880, Credit for Qualified Retirement Savings Contributions, is used to claim the credit. Just be sure to attach the form to your return.
If you use a professional tax preparer, be sure they know about the contribution you have made or intend to make.
The Saver's Credit isn't the only benefit in the tax law that rewards those who save for retirement. For example, depending on your income you may be able to deduct all or part of your contributions to a traditional IRA even when you take the Saver's Credit on the same contribution. Pretty sweet, huh?
And those who can and do choose to save through an employer's 401(k) or 403(b) plan will see those contributions reduce the amount of taxable wages shown on their Form W-2 at the end of the year, saving federal and state income tax on the contribution they would otherwise have to pay on those wages.
If your employer has a matching program for those types of contributions, the incentive to save is even sweeter. The reduced taxable income, combined with the potential Saver's Credit and the employer matching funds can add up to a nice retirement nest egg over time.
So now may be the time, using the tools and benefits discussed above, to take control of your retirement future!
