Savers Credit Eligibility and Income Restrictions

Although saving for retirement isn’t always easy with a low income, there are benefits to help ease the burden for those who can swing the yearly contributions. Eligible savers can enjoy the reward of a Savers Credit to reduce the amount they owe on their taxes next year. Most low-income savers don’t take advantage of this benefit either because they don’t know it exists or don’t know they qualify. Take a look at the eligibility requirements and income limit restrictions that are currently in place for the Retirement Savings Contributions Credit, or Saver’s Credit, below.

Eligibility

  1. Only workers 18-years-old and older may use the Savers Credit. Anyone can contribute to an IRA at any age as long as they have taxable income, but young savers will still need to wait until at least 18 to use the tax benefit.
  2. Student status. Even people who are 18-years-old will still disqualify if they are full-time students.
  3. Savers will also be disqualified if they are listed as a dependant on someone else’s tax form.
  4. Retirement accounts. To use the Savers Credit, workers must contribute to a qualified retirement plan, which include any of the following: IRA, Roth IRA, SIMPLE IRA, SEP IRA, 401(k), 403(b), 501(c)(18), and/or 457(b).

Income Restrictions and Credit Percentages

The percentage of your contribution returned as credit is either set at 10%, 20%, or 50% and is tiered base on income. The maximum credit you can qualify for is $2,000 for a single person and $4,000 for a married couple filing jointly. It is important to note that the Savers Credit is non-refundable, meaning that the credited amount can only be used to lower an owed tax balance. If you don’t owe on your taxes or the amount credited is more than what you owe, you will not be refunded the extra money. Rollover contributions from one plan to another also don’t qualify as eligible contributions for the Savers Credit. Refer to the categories below to see if you qualify. All numbers are based on the limits for the 2017 year.

  1. Married Filing Jointly. For this group, the maximum return of 50% of their retirement contribution is activated at an adjusted gross income of no more than $37,000. Workers earning between $37,001 and $40,000 will have 20% of their contribution returned as credit. Workers earning between $40,001 and $62,000 will only have 10% of their contribution returned as a credit. AGI over $62,000 disqualifies this group for the Savers Credit.
  2. Head of Household. To qualify for a 50% return as credit, savers who are heads of household must earn no more than $27,750. For a 20% return, this group must earn between $27,751 and $30,000. Workers earning between $30,001 and $46,500 qualify for a 10% return, and more than $46,500 disqualifies this group from the Savers Credit altogether.
  3. All Other Filers. This group may include single filers, qualified widowers, or married filing separately. For a 50% return, workers must earn no more than $18,500. For a 20% return, the income level must be between $18,501 and $20,000. For a 10% return, earners can make between $20,001 and $31,000. More than $31,000 disqualifies this group from the Savers Credit.

How to Save for Retirement in Your 20s, 40s, and 60s

Saving for retirement can be overwhelming with all of the different investment options available. Some people will put off saving for retirement because they don’t want to make a mistake with their money or think they don’t have enough income to sacrifice each month to make the short-term hits worthwhile. Other people think that they can start saving for retirement later, but they are caught playing catch-up when later finally arrives. It doesn’t matter if you are just entering the workforce or are hoping to exit it soon, the worst thing you can be doing with your finances at any age is not saving for retirement. Below are a few suggestions on how best to utilize your resources throughout your life to successfully save for retirement.

What to think about in your 20s

This may seem like the most difficult age to start saving for retirement with all of the other financial responsibilities weighing people down, like student debt. However, saving a little bit consistently in your 20s will compound into a hefty sum by the time you’re ready to use it for retirement. Because you have time on your side when it comes to investing, you can afford to invest more of your money into riskier, but eventually highly rewarding, options such as stocks. Investing in a niche you’re comfortable with and learning to weather the economy’s ups and downs can help you reach your long-term financial goals more quickly.

If you’re lucky enough to work for an employer who offers matching contributions through a 401k plan, take advantage of the free money by contributing at least the maximum matching amount. You will also want to research the differences between traditional and Roth IRAs, especially if you qualify for both, and determine which will benefit you the most in the long-run. Even though it may seem difficult to start saving now, financial burdens only tend to increase the older you get.

What to think about in your 40s

This is the age where most people fall behind in their contributions for staying on track with their long-term goals. You may have children’s college tuition, aging parents, and other obligations to take care of. However, neglecting retirement contributions or, worse, borrowing from your retirement can have a significant impact on your overall total at retirement. For instance, contributing just $1,000 annually after age 40 versus an IRA maximum contribution of $5,500 throughout your whole life can cause you to lose out on hundreds of thousands of dollars by the time you reach retirement.

As you transition closer to retirement age, you should also think about transitioning some of your more risky stock options into safer investments such as bonds. The closer to retirement you get, the less risky you want to be with your hard-earned money.

What to think about in your 60s

You may be thinking about retirement more than ever at this stage in life, and hopefully you started taking advantage of catch-up contributions for both your IRA ($1,000 more per year) and your 401k ($6,000 more per year) at age 50 ½. Your house should be close to, if not fully, paid off so you don’t have to worry about that expense in retirement. Most of your funds should be in safer investments by now so you don’t have to rely on a turbulent market to swing in your favor when you need to start taking distributions. It’s important to meet with your financial advisor to create an action plan for required distributions and how they will affect your accounts. Lastly, you may want to consider delaying your social security benefits until age 70 to really maximize those payments once they start arriving.