Retirement Savings Contributions Credit

by Penny Saved on January 19, 2007

If you meet the criteria, you can claim up to a 50% credit for contributions to a qualifying retirement savings account(a.k.a Saver’s Credit).  I’ve used it in the past and if everything falls into place this year, I might qualify again.  It’s gonna be close though.

Here’s how you qualify.

  • You’ve got to have been born before January 2, 1988.
  • You are not a full-time student.
  • No one can claim you as a dependent
  • Your adjusted gross income is not more than
    • $50,000 if married filing jointly
    • $37,500 if head of household
    • $25,000 if married filing separate, filing single or qualifying widow with dependent child

It’s pretty obvious by those standards that while many will qualify, few will take advantage of it.  The problem is that you need to be making very little to qualify.  That is the point of the credit.  To get the lower income families to contribute to retirement savings and lessen the load on Social Security, welfare, medicare, etc…

Now, what contributions are eligible?

All contributions to a traditional IRA, Roth IRA, 401(k), SIMPLE 401(k), 403(b) annuity, governmental 457 plan, SIMPLE IRA, salary reduction SEP, and a 501(c)(18) plan are deductible.  That pretty much covers everything.

The deduction ranges from 10% to 50% and is tied to your AGI. You can refer to IRS Form 8880 to see the full table of AGI’s and their respective deduction %’s.

[tags]retirement savings contributions credit,savers credit,ira,roth ira,401(k),IRS,taxes[/tags]

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{ 3 comments }

Super Saver February 6, 2007 at 4:19 pm

Penny,

Nice tip on having the government fund one’s retirement savings. I will highlight your article as My Wealth Builder’s choice for the Carnival of Personal Finance #86.

Jade February 19, 2007 at 11:27 pm

HI I wanted to see if any of you financially wise people could give me some advice.
My relatives have been talking about gifting me $100,000( I won’t hold my breath)If it happens I want to have a plan. what would you do with it?
Jade

Tim February 22, 2007 at 11:04 am

Jade,
Like any large cash windfalls you shouldn’t do anything with it until you get professional financial guidance from a financial adviser or your family (since they have sufficient to give you $100K) who can take a look at your overall financial and tax picture. The best thing to do is to put it in your current interest bearing account or into a high yield savings account until you can get financial guidance on your entire financial picture. Other than that, I wouldn’t do anything with it.

The problem with large cash windfalls, is that people tend to spend it all or allocate in areas that are unwise relative the person’s financial and tax situation.

I’m sure that since your relatives have sufficient resources to gift $100k, that they can provide you financial guidance as well. Otherwise, get a hold of a certified financial planner and go from there.

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