Saving for retirement can be challenging. For young workers, paying the rent and buying the week’s groceries may take priority and there is only so much money to go around. And even older workers who are working part time as they phase into full time retirement can be adding to their retirement next egg. There is an often-overlooked tax break that may make saving for retirement more attractive.
The IRS offers a Retirement Saver's Credit as an important leg up for lower income earners and savers. You are eligible for the credit if you are age 18 or older, not claimed as a dependent on another person’s return, and not a student.
The tax credit is available to lower-income workers who make IRA contributions or contribute to an employer plan. The maximum contribution amount eligible for the credit is $2,000. Since the maximum credit rate is 50%, an IRA owner or plan participant can potentially reduce tax liability by up to $1,000. Rollover contributions do not qualify for the credit. The credit is nonrefundable which means it cannot reduce your tax liability to less than zero. Also, it may be reduced by any recent distributions you received from your retirement plan or IRA. The Saver’s Credit can be a double tax break because it is available in addition to any deduction in income that may be available for a retirement savings contribution.
When preparing your taxes, be sure to check out this tax credit opportunity. It might make it worth while for you to add money to your IRA this year (before May 17 for 2020 contributions), knowing that the IRS will be footing part of they bill!