It’s hard enough for you to save money for retirement—how are your kids going to do it?
Strategy: Clue them in to the retirement saver’s credit. This little-known tax break can provide a big boost to low-wage earners.
The amount of the available credit depends on your adjusted gross income, tax filing status and contribution amount.
Here’s the whole story: The retirement saver’s credit is applied to the first $1,000 or $2,000 for married joint-filing couples of voluntary contributions made to a tax-qualified retirement plan such as a 401(k) or an IRA. Although greater contributions are permitted, the maximum amount allowed for the credit remains $1,000 ($2,000 for joint filers).
The credit may be equal to 50%, 20% or 10% of the qualified contribution, depending on the saver’s income bracket, indexed for inflation (see chart). Once the income level for the 10% credit is exceeded, you can’t claim any credit.
Other restrictions may apply. For instance, the credit can’t be claimed by a taxpayer who was under age 18 last year, a full-time student or as a dependent on someone else’s tax return.
Tip: This credit is nonrefundable. Thus, it can reduce your tax bill to zero, but you can’t collect any excess credit amount.