Understanding Tax Credits for Retirement Savings
Most of us have heard about the historically low savings rate in the United States, and the government is understandably concerned that most Americans are woefully unprepared for retirement. In an attempt to encourage people to save more for their own retirement, the government has provided a number of tax credits and tax incentives for retirement savings.
One of the most important tax credits used to encourage retirement savings is the Retirement Savings Contributions Credit. Those who qualify for this credit may be entitled to a tax credit of $1,000 for single filers and $2,000 for married couples filing jointly. Those who make contributions to 401(k) plans and other qualified retirement savings vehicles may be entitled to take this tax credit, and the amount for the credit is determined on a sliding scale based on income and retirement plan contribution.
There are three qualifications necessary for taking the Retirement Savings Contributions Credit, and they are:
- An individual taxpayer must have income of $25,000 or under.
- A taxpayer filing as a head of household must have income of $37,500 or less.
- A married couple filing jointly must have income of $50,000 or less.
In addition, the taxpayer must be at least 18 years of age, and he or she cannot be a full time student. The last requirement is that no one can claim the taxpayer as a dependent on another return.
This tax credit can be taken in addition to the other tax advantages that accrue from investing for retirement. That means that taxpayers can still enjoy the pretax status of 401(k) contributions, and they can still take a deduction for a traditional IRA deposit. It seems the government is serious about urging people to save for their own retirements, and this tax credit is one way they plan to do that.
It is important for everyone who is eligible to take full advantage of this important tax credit. Saving for your own retirement has never been more important than it is today. Just consider that the future of Social Security is more in doubt with every passing day, and that the defined benefit pension plan is quickly disappearing. By the time most of our children enter the workforce, the traditional pension may well be dead, and it will be up to each individual worker to save for his or her own retirement.