Retirement plan decisions made easy
Drill Down: Retirement Savings Contribution Credit
If you earn relatively little, there’s even more good news: a federal tax credit. A tax credit is better than a deduction because it directly reduces the amount of taxes you owe, making it as good as cash. Unfortunately, the federal tax credit is limited.
Eligibility for Saver’s Credit (in 2007):
Single person with income less than $26,000 a year
Head of household with income less than $39,000
Joint return with income less than $52,000
These amounts change every year. Check out the IRS web site for the latest figures by searching www.IRS.gov for “Retirement Savings Contribution Credit.”
The credit is not available to full time students and people claimed as a dependent on someone else’s (like a parent’s) tax return.
The tax credit runs on a sliding scale, starting at 50 percent for single filers with income under $15,500 and joint filers with incomes less than $31,000. As incomes rise, the tax credit falls, until it reaches ten percent for those just under the threshold of eligibility.
Think about what this means for the lowest income workers whose companies will match their pay 50 cents on the dollar: 401k contributions are free! Half the contribution is matched by the company, and the other half offsets federal taxes. It’s a great deal if you can tighten your belt a little to be able to make the contribution.
Keep in mind, however, that this is not a “refundable credit.” If you have enough deductions that you owe no tax whatsoever, you will not get cash back from the government. You’ll only benefit if you have a tax liability. (I’m NOT talking about whether you get a refund after you file your taxes; I’m talking about whether your tax return shows that you pay any tax at all.)
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Lesson 1: What the Heck is a 401k, and What’s So Great About It?
» Lesson 2: Contributions to Your 401k
Lesson 3: Investments “Cook Book” Approach
Lesson 4: Investments: How Investments Work
Lesson 5: Loans and Hardship Withdrawals from Your 401k
Lesson 9: Your 401k, Your Other Assets, and Your Life
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