By: Preston Mangus
As a VyStar Financial Counselor, I am often the bearer of bad news: No, I do not think that playing the lottery is a prudent retirement strategy. And your chances of some distant relative dying and leaving you a huge amount of money are only slightly better than the lottery scheme. But on the brighter side, if you put money away in a retirement account during the year, you can get money in the form of a tax credit from the Internal Revenue Service (IRS) if you are eligible.
The Retirement Savings Contribution Credit, also known as the “Saver’s Credit,” can earn you as much as $1,000 per individual; $2,000 if married and filing jointly. If qualified, you can receive a tax credit of 50%, 20% or 10% depending on your filing status and adjusted gross income (AGI). A tax credit is different from a tax deduction: A credit means that you get the money back, either added to your refund or subtracted from your tax liability.
Here is an example. Jane and Bob are married, and she earned $33,000 in 2016. Bob, a stay-at-home dad, had no earnings. Jane contributed $1,000 to her traditional IRA. Since the IRA is deductible, Jane’s adjusted gross income reported is $32,000. Jane may claim a 50% tax credit, or $500 thanks to her $1,000 IRA contribution. How cool is that? Other qualifying retirement plans include 401(k), SIMPLE IRA, SEP-IRA, 403(b) and 457(b) contributions. The program is meant to encourage people to contribute to their retirement accounts. So though it’s not required, it’s a great idea to take any credit you might receive and place it right into your account and save even more money for retirement.
Though this program is primarily designed for those earning low to moderate incomes, it may be applicable in your case. The chart below explains the income limitations and credits available. For the 2016 tax year, below are the IRS AGI thresholds for each tax filing status, and the credit rate you can expect to receive if you qualify:
You will need to complete IRS Form 8880 to see if you qualify for the credit. For additional information, please visit the IRS website or contact your personal tax advisor. If you are doing your own taxes, consider taking advantage of the $20 off TurboTax federal products discount offered to VyStar members. The program can help guide you through filing, including filling out forms like Form 8880.
If you can’t qualify this year, take heart: The credit will also be available for 2017, so make the most out of that time and put together a plan now for next year’s filing.
The above article is intended to provide generalized financial information designed to educate a broad segment of the public; it does not give personalized tax, investment, legal, or other business and professional advice. Before taking any action, you should always seek the assistance of a professional who knows your particular situation for advice on taxes, your investments, the law, or any other business and professional matters that affect you and/or your business. The content provided in this blog consists of the opinions and ideas of the author alone and should be used for informational purposes only. VyStar Credit Union disclaims any liability for decisions you make based on the information provided.