In addition to all the other benefits of a self-directed IRA, did you know that you may also be eligible to receive a further tax benefit for contributions to that you make to your account? The Retirement Savings Contribution Credit (sometimes also known as the “Savers Credit”) can reduce an individual’s tax bill by up to $1,000 if their income is below certain thresholds (or up to $2,000 for taxpayers filing joint tax returns). The Savers Credit was created as a way to provide a direct financial incentive for lower income workers to save for retirement.
Below is the key information that you’ll need to be able to determine whether or not you’re eligible to apply the Savers Credit to your tax return for contributions you make to your self-directed IRA.
Income Threshold. In order to be eligible to claim any portion of the Savers Credit, a single person must have an adjusted gross income of less than $28,750 for 2012. An individual filing as a head of household must have an adjusted gross income of less than $43,125. Finally, a person with a tax filing status of married filing jointly must have an adjusted gross income of less than $57,500.
For the 2013 tax year, these amounts will rise to $29,500 for those with a single filer tax status, $44,250 for a head of household, and $59,000 for those with a tax filing status of married filing jointly.
Amount of Credit. For those who are eligible, the amount of the Savers Credit will be 10%, 20% or 50% of the amount of the contribution that an eligible makes to their self-directed IRA (or to any eligible employer-sponsored retirement plan). The exact amount of the credit will depend on the tax filer’s adjusted gross income. IRS Form 8880 contains a chart to help you make the calculation.
Personal Status. Furthermore, in order to claim the Savers Credit, an individual must be at least age 18, not a student on a full-time basis, and not be claimed as a dependent on any other person’s tax return.
Nature of the Credit. The Savers Credit will lower an individual’s overall tax bill on a dollar for dollar basis, but any unused portions of the Saver’s Credit will not increase an individual’s refund.
Contributions Net of Distributions. When you evaluate how much your eligible retirement contributions were for the year, you must first subtract whatever distributions you received from your account within the two-year period before the year that you’re claiming the credit and including the filing year. There are certain types of distributions that are exempted from this general rule.
Setting up and making regular contributions to a self-directed IRA can be a great way to build wealth for your retirement years. Depending on your income you may be able to save yourself even more money by claiming the Savers Credit on your tax return.
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