How Tax Credits Can Encourage Retirement Savings
While the need to save for retirement has never been greater, it seems that most of us are saving far less money than we need to for a comfortable retirement. With Social Security constantly under siege and the future of many corporate pension plans very much in doubt, it has never been more important than it is today to save and prepare for your own retirement.
Unfortunately, many of us never get around to saving for retirement, and that can leave those on the verge of retirement in a very tough spot. The government has begun to recognize this imbalance between what is needed and what is being saved, and they have come up with some innovative and valuable tax credits to help workers put away money for their own retirements.
These tax credits are over and above the tax benefits that can be enjoyed by those investing in 401(k) and 403(b) retirement plans, and those enjoyed by workers who invest in traditional Individual Retirement Accounts (IRAs).
One of the best tax credits is known as the Retirement Savings Contributions Credit. Those who qualify for this special tax credit can be eligible for a credit of $1,000 for single tax filers and $2,000 for married couples filing joint returns. This credit can be taken by eligible taxpayers who contribute to 401(k) plans and other qualified retirement plans. The amount of credit received is based on a sliding scale which is based on both the taxpayer’s income and how much is contributed to the qualified retirement plan.
The eligibility requirements for the Retirement Savings Contributions Credit are:
- For individual taxpayers the income must be $25,000 or less.
- For heads of households the income must be $37,500 or less.
- For married couples filing joint returns the income must be $50,000 or less.
- The taxpayer must be 18 years of age or older.
- The taxpayer cannot be a full time student.
- The taxpayer cannot be claimed as a dependent on another person’s tax return.
The important thing to know about this great tax credit is that it can be taken in addition to the tax advantages already enjoyed by those who sock money away in 401(k) and other retirement plans. By contributing pre-tax money to a 401(k) or 403(b) plan, you are already helping to lower your taxes, so this tax credit is just icing on the cake. With all these advantages it is even more important to put money away for the future, and saving for your own retirement is quickly becoming a necessity.