We have talked a lot before about how saving for retirement is really important. But for those with lower income, it is really a hard thing to do. The IRS offers a tax credit to help out those individuals.
What do you mean when you say “lower income”?
This particular credit is really targeted for married couples with income under $64,000 or single people under $32,000. If you are Head of Household, the limit is somewhere in the middle—about $48,000. So not your high incomes are going to benefit from this particular credit.
How much is the actual credit itself?
The range of the credit is somewhere between 10 percent and 50 percent of contributions—up to $4,000 for a married couple and $2,000 for others. In other words, if you had a 50 percent credit and you made a $4,000 contribution as a married couple, you would get a $2,000 tax credit. So they are paying for about half.
Who is eligible for this credit?
The one thing the IRS really did not want to do is they did not want to make it so that college students that are being supported by mom and dad are taking advantage of this credit. To be eligible, you have to be 18 or older, not a full-time college student and not claimed as a dependent on your parents’ or somebody else’s return. So that kind of eliminates that college student.
What kind of contributions count?
Everything that you can think of. Whether you put it into a regular IRA, a Roth IRA or 401(k) available through an employer, or if you’re self-employed and you have a Simplified Employee Pension plan (SEP) or a SIMPLE IRA plan … all of those kind of contributions qualify for this particular credit.