The Saver’s Credit

Your federal government wants you to save for your own retirement. In fact, they want it so much they are willing to give you a matching contribution of sorts. But only if you have low income. In other words, you can get a reward for saving only if you are too poor to afford to save. Oh well.

Notwithstanding that Catch 22, there are plenty of people who can afford to save for retirement and who meet the requirements to benefit. Here are the ground rules.

• This governmental benefit comes in the form of a tax credit. It’s not an actual matching contribution, in that it’s not added to your retirement account, like your employer’s 401(k) match. Rather, it comes to you in the form of reduced income tax liability (or an increased refund) come April 15. So your tax credit ought to free up an equivalent number of other dollars, enabling you to increase the amount you otherwise were able to contribute to a retirement plan. Economically, the tax credit can act just like a matching contribution. That’s the theory anyway.
• The tax credit is not a refundable credit. That means it is limited to no more than your income tax liability for the year. Unfortunately, this takes a lot of low-income people out of the running.
• You become entitled to the credit by contributing to a tax-favored retirement plan of some kind, either an Individual Retirement Account, a Roth IRA, or your own contribution to a 401(k) plan, 403(b) Plan, 457 Plan, or SIMPLE IRA Plan.
• The maximum contribution that’s matched is $2,000 per year.
• The credit percentage, or matching percentage if you will, is based on your Adjusted Gross Income. The lower your Adjusted Gross Income, the higher your matching percentage. It starts out at a healthy 50% match if your AGI (in 2009) is under $16,500 ($33,000 if married), and ratchets down to 10% if your AGI is under $27,750 ($55,500 if married). AGI above those amounts, and you’re out of luck. No credit for you!
• To avoid abuses, your contribution that otherwise entitles you to a tax credit is reduced by any recent distributions you took from a retirement plan—during the year of your contribution or the following year up to the due date of your tax return, or either of the two preceding years.
• To avoid even sneakier abuses, your matched contribution is also reduced by recent retirement plan distributions taken by your spouse. They’re up to your tricks, you rascal.
• Those under age 18, full time students, and those claimed by a parent as a dependent cannot qualify for the saver’s credit.
• You claim the credit by filing a Form 8880 with your tax return.

If you meet all these requirements, you have extra reasons to strive to put away a little something for the future.