Monday, May 28, 2012

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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  1. You've done someone a huge service in printing this! While we don't qualify (thank goodness!) I'm also pretty savvy about taxes and haven't ever heard of it. We have a number of younger employees, tho, who would qualify and next year I will certainly let them know about it.

    I wonder if Turbo Tax has it built in? Let's hope so!

    Am a huge advocate of 401(k). If young people would just start with a small amount - 1 or 2% - and increase as they can it would make a huge difference over a 30-40 year work life... even given our economic times.

    Good job, Savvy!

  2. I'm going to see my CPA tomorrow and will ask her about this. I'm self-employed and barely scraping by, but my BF might be able to swing it!

  3. Savvy, This is great, very useful information. Thanks for sharing it!

  4. Webb,
    I bet Turbo Tax has it built in, I will watch for it next year. Also, with your employees another suggestion I heard at the seminar was to automatically enroll them in your 401(k) plan. They recommend using a deferral that allows the employees to receive the maximum 401(k) match. Employees then have three months to opt out of the plan getting all of their deferral monies back including earnings, penalty and tax free. Studies have shown that after employees see how little is actually taken out of their checks (pre-tax) they decide to stay in the plan. Just one more way to encourage saving.

  5. Heidi,
    I hope you are able to take advantage of this. I am sorry to hear things are so tough financially - I didn't know. I talk to so many people that dream of working for themselves. I guess the grass isn't always greener.

  6. Monica,
    As always thank you for stopping in and your comment.

  7. Hmm.. never heard of this credit. I don't think we would qualify but we are so close. Our retirement savings definitely need a makeover. Thanks for stopping by.

  8. This type of credit will greatly benefit those who have low-income jobs and can't save for retirement. Awesome article, thanks a lot for sharing!

    Darwin Feldman

  9. I am going to check this book out! I am stopping by from ChasingJoy #FBF

  10. Tiffany,
    I hope you like it. I found it really informative. Thanks for stopping in.

  11. I believe I used this credit when I filed my taxes last year. Thanks for bringing this to more people's attention.

    Thanks for linking up for #FlashbackFriday.