Saving for retirement can be difficult when you don't make a lot of money. But fortunately, there's a special provision in the tax code designed specifically to help lower- and middle-income Americans build a bigger nest egg.
It's called the Saver's Credit, and it could provide you with up to a $1,000 tax credit as a single person or up to $2,000 as a married couple. Since tax credits reduce your tax bill on a dollar-for-dollar basis, that's basically like getting $1,000 to $2,000 in free money.
Here's how it works.
How to score up to $2,000 in free retirement money
The Saver's Credit is a tax credit that takes money off your tax bill when you make retirement contributions to eligible accounts such as an IRA or workplace 401(k). Specifically, you'll get back between 10% and 50% of the first $2,000 in contributions you make -- and that includes money taken directly out of your paycheck and put into a workplace plan.
The table below show how large of a percentage of your contribution you can expect as a credit for the 2020 tax year, based on your adjusted gross income (AGI) and filing status. These numbers are indexed to inflation, and the income thresholds will be a little higher in 2021.
You'll receive a credit equaling
If you're single or married filing separately and your AGI is:
If you file as head of household and your AGI is:
If you're married filing jointly and your AGI is:
50% of your contribution
$0 to $19,500
$0 to $29,250
$0 to $39,000
20% of your contribution
$19,501 to $21,250
$29,251 to $31,875
$39,001 to $42,500
10% of your contribution
$21,251 to $32,500
$31,876 to $48,750
$42,501 to $65,000
So, what does this mean for you? Suppose you're a married joint filer with an adjusted gross income of $38,000. You and your spouse would be entitled to a credit equaling 50% of the first $4,000 in contributions ($2,000 for each of you). If you contribute a combined $4,000, you'd get a tax credit of $2,000.
Of course, if your income was a little higher, your credit would be lower. If you had an AGI of $50,000 and contributed $4,000 as a married couple, you'd receive a credit valued at 10% of your contribution, or $400. While this isn't quite as generous, it's still free cash for retirement contributions that can help you build a more secure future.
And tax credits are much more valuable than tax deductions. While a $2,000 deduction would only reduce your tax bill by up to $240 if you're in the 12% tax bracket, a tax credit provides a dollar-for-dollar reduction. If you had previously owed $5,000 in taxes and you got a $2,000 credit, you would now owe only $3,000.
There are a few requirements to take advantage of the Saver's Credit, beyond just the income limits. For example, you can't be claimed as a dependent on someone else's tax return and must be at least 18 years old. You can't be a full-time student, either.
But if you're eligible, there's no reason to pass up free money. So aim to contribute at least the $2,000 as a single person or $4,000 as a couple for the maximum help from Uncle Sam in growing your nest egg.
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