Beginning in 2008, there was a change in Federal tax laws which provide a tax-credit for low to medium income earners who put away money into an individual retirement account (IRA) or 401(K) plan at work. The tax credit, called the “Retirement Savings Contribution Credit” will give you a tax credit of 10%, 20% or 50% of the money that you invest depending on your household income.
If you are married filing jointly and make below $32,000 per year, you will qualify for a tax-credit of 50% of your contribution amount. If you are married filing jointly and make below $34,500 and more than $32,000 per year, you will qualify for a tax-credit of 20% of your contribution amount. If you are married filing jointly and make below $53,000 and above $34,500 per year, you will qualify for a tax-credit of 10% of your contribution amount.
If you are single and make below $16,000 per year, you will qualify for a 50% tax-credit on your total contribution amount. If you are single and make below $17,250 and more than $16,000 per year, you will qualify for a 20% tax-credit on your total contribution amount. If you are single and make below $26,500 and more than $17,250 per year, you will qualify for a 10% tax-credit on your total contribution amount.
If you file as head of household and make below $24,000 per year, you will qualify for a 50% tax credit on your total contribution. If you file as head of household and make below $25,875 and above $24,000 per year, you will qualify for a 20% tax credit on your total contribution. If you file as head of household and make below $39,750 and above $25,875 per year, you will qualify for a 10% tax credit on your total contribution.
It’s a great tax credit for lower-income families that qualify for it. There is a maximum credit of $1,000, so if you were able to make a very large contribution to your IRA, Roth IRA or 401(k) plan relative to the income that you make, you may not qualify for the full amount of the deduction.
Remember that you can also decrease your adjusted gross income by investing money into a pre-tax retirement plan. By maximizing your 401(k) contributions and traditional IRA contributions, you will receive a tax deduction for the amount of your contribution regardless of your income.
Ultimately, it pays to save for retirement. You will almost certainly benefit from a tax-deduction since you’re paying the taxes when you take the money out, you may earn a refundable tax credit through the “Retirement Savings Contribution Credit”, and all of the money in your investment accounts will grow tax-free throughout your working life.
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