If you're doing your taxes soon, don't miss the saver's credit. It's a great retirement planning tool.
The saver's credit is available to middle-income workers and those who make less than that who are saving for retirement. Lots of people overlook it -- only 10 percent of full-time American workers with annual household incomes of less than $50,000 are aware of the credit, according to a survey released today from Transamerica Center for Retirement Studies.
The credit is available to workers ages 18 years or older who have contributed to any of these retirement savings plans: a 401(k) plan, including a SIMPLE 401(k); a section 403(b) annuity; an eligible 457 deferred compensation plan of a state or local government; a SIMPLE IRA plan; or a salary reduction SEP. The saver's credit is also available for voluntary after-tax employee contributions to a tax-qualified retirement plan or section 403(b) annuity.
You can save up to $2,000 for a maximum credit of $1,000 -- 50 percent of the amount you've saved -- or less, depending on your income. The credit doesn't affect your eligibility to exclude your savings from your income, nor does it have an impact on your earned income credit or your child care tax credit.
My colleague, Bankrate tax blogger Kay Bell, offers a complete analysis of eligibility. But here it is in a nutshell:
- Single filers with adjusted gross income, or AGI, of up to $27,750 in 2010 or $28,250 in 2011.
- Heads of households with an AGI of less than $41,625 in 2010 and $42,375 in 2011.
- Married and filing jointly with an AGI of $55,500 in 2010 or $56,500 in 2011.
Additionally, the filer cannot be a full-time student or be claimed as a dependent on another person's tax return.
If you are using tax preparation software to prepare your tax return, use Form 1040A, Form 1040 or Form 1040NR. The credit is not available with Form 1040EZ; however, the IRS has included instructions with the EZ form directing you to a different form if you choose to claim the credit. If your software has an interview process, be sure to answer questions about the saver's credit, retirement savings contributions credit and/or the credit for qualified retirement savings contributions.
If you are preparing your tax returns manually, complete Form 8880, the Credit for Qualified Retirement Savings Contributions, to determine the exact credit rate and amount. Then transfer the amount to the designated line on Form 1040A, Form 1040 or 1040NR.
Just because you haven't saved yet, doesn't mean you can't take a credit. In most cases, the IRS will let you put the money away and take the deduction on your 2010 taxes clear up to your filing deadline -- April 15 for most of us.