How to save for retirement when you don’t make a lot of money?

Ever since I read the book Shortchanged: Why Women Have Less Wealth and What Can Be Done About It by Mariko Chang, I have been more cognizant of how difficult it is for low-wage earners to save money for retirement. When I heard about the Tax Savers Credit at a seminar this week I took notice.

What is the Tax Savers Credit?
The tax savers credit was designed to help low and moderate income workers save for retirement. Unlike a tax deduction, a tax credit reduces the tax you owe dollar for dollar. This credit is available to anyone who meets the income limitations and made contributions to qualified retirement plans including 401K, traditional or Roth IRAs, 457s, 501c, SEP and SIMPLE. The credit can be taken even if you don't make a contribution for the previous year until April 15 of the current year.

The tax savers credit provides a credit of between 10% and 50% of the amount contributed to an eligible plan up to $2,000. For someone filing as a single taxpayer who meets the income requirements would receive a maximum credit of $1,000 on contributions of $2,000. Taxpayers filing jointly would receive a maximum credit of $2,000 on contributions of $4,000.

The credit does not affect your eligibility to exclude your savings from your income, and does not impact your earned income credit or your child care tax credit.

The credit is non-refundable. It will reduce the taxes you owe, but will not help you generate a tax refund. For example, if you are eligible for a $1,000 credit, but owe taxes of $800 the tax savers credit will reduce your tax liability to zero, but will not provide you with a $200 refund.

The adjusted gross income limits to claim the savers credit in 2012 are as follows:

• For Married couples filing jointly : Maximum adjusted gross income (AGI) –$57,500
• For Heads of Household : Maximum adjusted gross income (AGI) – $43,125
• For Married individuals filing separately and $28,750 in 2012.

If you would like to see a table that provides the percentage of credit allowed by income for 2011, please see this article. I can't locate a similar table for 2012.

Adjusted gross income is your taxable income after you have subtracted personal exemptions and itemized deductions.

Other rules that apply to the saver’s credit:

• Taxpayers must be at least 18 years of age.
• Anyone claimed as a dependent on someone else’s return cannot take the credit.
• A student cannot take the credit. A person enrolled as a full-time student during any part of 5 calendar months during the year is considered a student

In the Los Angeles Times article Retirement Saver's credit could significantly reduce tax bill Kathy M. Kristof wrote:

"Hardly any of the people who qualify for the credit are aware of it," said Catherine Collinson, president of the Transamerica Center for Retirement Research. Collinson's organization surveyed thousands of individuals and found that only 12% of the respondents who earned less than $50,000 — those most likely to qualify for the credit — had heard of it. And just 17% of those who were aware of the credit had claimed it.

I am a CPA (working in industry not tax) and only became aware of this credit, which has been around since 2002, last week. If I hadn't heard of the credit, how are those who are not as financially savvy supposed to be aware of it. Let’s get the word out:

Have you checked to see if you are eligible for the TAX SAVERS CREDIT?

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