Tax Credits For Retirement Savings

Saving for retirement does not only benefit you in the long run but it can also provide you with an extra incentive when you do your taxes. You may qualify for a tax credit if you make eligible contributions to a retirement plan.

Tax Credits for Retirement Savings 

Social security will probably be under siege as baby boomers hit retirements.  Fortunately, many baby boomers have set aside loads of cash in 401ks and IRAs.  Still, many people fail to do all they can in this regard.  In an effort to motivate us taxpayers to save as much money as possible for retirement, Uncle Sam is dangling tax credits before us like the proverbial carrot. 

The tax credit in question is the Retirement Savings Contributions Credit.  If you qualify for this credit you may be eligible to get a credit of $1,000 for singles and $2,000 if you're filing jointly.  The credit is eligible for people who make contributions to 401ks and retirement vehicles.  The amount of tax credit is determined on a sliding scale depending on how much you make and contribute. 

You can claim the retirement savings tax credit: 

1.  Single, married filing separately, or qualifying widow(er) with incomes of $27,000 or less. 

2.  Individual taxpayers that are head of households and make $41,625 or less. 

3.  Married couples filing jointly who make $55,500 or less cumulatively. 

There are a few minor restrictions with regards to who is eligible for the retirement savings tax credit.  First, you must be older than 18 years of age.  Second, you cannot be a full time student.  Finally, another dependent can't claim you as a dependent on their tax returns. 

Importantly, this tax credit is in addition to other tax advantages you will get from piling money into a retirement account.  With a 401k, for example, you can pound in pre-tax earnings, which will reduce your adjusted gross income for the tax year.  After you figure out your taxes, then you will be able to deduct another $1,000 or so for the tax credit.  In other words, saving for your retirement is a no brainer. 

What form do you use in order to claim the retirement savings credit?  You will need to fill out Form 8880 (Credit for Qualified Retirement Savings Contributions). 

The federal government is virtually begging you to save money for retirement.  With this tax credit, there is absolutely no reason for failing to comply.