Planning Your Retirement

Low income retirement savings credit

Just over 4 years ago (in 2002), a new tax credit became available to low income taxpayers who are able to save money in an IRA, 401(k), 403(b), or 457 plan. If you think you fit into this category to get the 50% tax credit, you need to make retirement contributions a top priority as this is a substantial offer.

Single workers

Single workers with gross income of $15,000 or lower can get a tax credit for 50% of their contributions to a traditional IRA, a Roth IRA, a 401(k), a 403(b) and even a 457 plan. If a single worker with an adjusted gross income of $15,000 or less contributes $1,000 to a traditional Ira plan, that worker would be able to deduct the contribution (meaning, a tax savings of $150 if they are in the 15% tax bracket. So, the government is making $650 of the contribution, and only $350 comes out of the single workers pocket.

This means, that it would really seem hard to imagine that nay worker earning $15,000 or less would be able to find even $350 to contribute to an IRA account. So, it also seems as though this tax benefit may not get much use. But if you can manage to get the money to do this investment – do it. It is a great discount.

Single workers with adjusted gross income between the amounts of $15,000-$16,250 can get a tax credit for 20% of their contributions to a traditional IRA, a Roth IRA, a 401(k), a 403(b), and even the 457 plan. If the adjusted gross income is yet a bit higher – between the amounts of $16,250-$25,000, the tax credit is 10% of their contributions. Now, if you do the math on the last couple discounts, you will see that they are less lucrative and there may be better investments at this stage fro those incomes. If you meet the requirements fro the 50% discount, you really should try to come up with a way to do this investment. But if you are reading this article because you have bad debt and you are trying to become debt free the other two discounts are again – not that attractive.

Married or head of household

The same 50% tax credit for contributions to the same accounts as listed above is available to workers who are married filing jointly with adjusted gross incomes less than $30,000, and also to workers who file as head of household (meaning, they support a dependant child or children) with adjusted gross income less than $25,000. Now, if you are married living on $30,000 it is hard to imagine you will be able to spare the money needed to contribute for this advantage (just as above with singles making under $15,000). Again, if you can find the means - do it. 50% is a tremendous perk.

The range for the 20% credit is between $30,000-$32,500 adjusted gross earnings, or head of household at $22,500-$24,375. The range for the 10% credit is an adjusted gross income between $32,500-$50,000 for married couples and $24,375-$37,500 for head of household. In these income ranges you may also find it easier (as opposed to being single) to come up with the money to save, depending on where you live and other factors. But the smaller percentage credits will obviously make a much less positive impact on your total savings. Again, the way to go is the 50% id you qualify – even though it would be difficult to find the extra money to save, it is worth it.

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