Low-income households have some extra motivation for retirement savings this tax season: The Saver’s Credit. If your family makes less than $60,000 per year, you could qualify for double benefits from your retirement contributions. You can save for the future and increase your income tax returns.
Your contributions of up to $4,000 per year can earn you multiple tax benefits. First, you’ll automatically get the default tax deferments for investing in a retirement account. Placing your money into a pre-tax IRA, a 401(k) or a 403(b) account can save you hundreds of dollars in state and federal income taxes. You can contribute as much as $5,500 per year to an IRA and $17,500 to a 401(k) or 403(b).
Secondly, you’ll get an added bonus from the federal government for being a financially responsible low-income earner. You can earn up to 50% of your first $2,000 per person in retirement investments back as a tax credit. That’s up to $1,000 as an individual and $2,000 as a married couple. These types of retirement savings are eligible:
- Roth IRAs
- Traditional IRAs
- 401(k) retirement plans
- 403(b) plans from non-profit organizations
To be eligible for the credit, you must meet several requirements. Your family’s income cannot exceed specific limits. Your filing status determines the exact limit; here is a more detailed breakdown:
- If you are unmarried or a married person filing separately from your spouse, you can earn up to $30,500
- If you are a married couple filing together, your combined household income can be up to $61,000
- If you claim Head of Household status, your maximum income for eligibility is $45,750.
Even if you meet the above income limits, there are a few other situations in which you will not qualify for the Retirement Savings Contribution Credit. The following scenarios will prevent you from claiming it:
- If a parent or other care-giver claims you as a dependent on their taxes, you may not use the Saver’s Credit.
- If you were a full-time student at any point in 2016, you are not eligible. This guideline includes summer classes, graduate students, and some union programs.
- If you are under the age of 18, you cannot claim the tax credit.
Your overall tax credit will depend on many factors. Your taxable income, unpaid taxes, and overall retirement contributions can affect how much you receive back after filing. Even if you don’t receive the full amount, the Retirement Savings Contribution Credit is a great way to build your financial future.