If you aren’t contributing to an IRA every year because of limited financial resources, you owe it to yourself to see if you qualify for the Saver’s Credit (“Retirement Savings Contributions Credit” -- see http://tinyurl.com/323rfmty).
The credit offsets income taxes dollar-for-dollar, which frees up some extra cash to contribute to an IRA. Eligibility is limited by income, capping out at $73,000 for married couples filing jointly and $36,500 for single filers. Plus, you must 1) be 18 or older; 2) not be a student; and 3) not be claimed as a dependent on a parent’s (or other person’s) tax return.
The best way to see if you qualify is to use the IRS tool called the Interactive Tax Assistant at tinyurl.com/2xbfst8s. When you go to the site, you’ll see a list of tax credits. Choose “Do I qualify for the retirement savings contributions credit?”
I used the tool to check the results for “Jimmy,” a hypothetical 23-year-old college graduate (B.A. 2022), who earned $20,000 in 2023. He wants to contribute $2,000 to a traditional IRA before the deadline (April 15, 2024) for the 2023 tax year.
The tool took me through a list of qualifying questions starting with filing status and questions about claiming any exclusions or deductions, and adjusted gross income. (Your adjusted gross income (AGI) is at line 11 of your Form 1040 or Form 1040-SR. See tinyurl.com/ms5sdjbt and tinyurl.com/araezme6.)
Then there were questions about contributions to (and distributions from) retirement plans, picking up IRAs, qualified retirement plans, 401(k)s, 403(b) annuities, governmental 457(b) plans and 501(c)(18) plans, and ABLE accounts, all of which qualify for the credit. (Another disqualifier for the credit is distributions that are as high or higher than contributions.)
The tool wrapped up with “Answers to your questions about credits.” The news was good for Jimmy: “You are a qualified individual for the Retirement Savings Contribution Credit.”
While this exercise may seem difficult, it isn’t. It’s worth the 15 minutes or so you’ll need to use the tool. If you get a positive answer, the next step is to determine the amount of the credit by filling out an easy one-page IRS tax form, Form 8880, Credit for Qualified Retirement Savings Contributions at http://tinyurl.com/32mypk2r. The maximum credit is $1,000 ($2,000 if married filing jointly).
The alternative is to use tax software to see what happens in two scenarios.
First, you need to understand how much Jimmy will pay in taxes assuming he does not contribute to an IRA. Jimmy’s $20,000 of income creates a federal tax bill of $618.
Then, run one or more scenarios to see what happens with an IRA contribution. If you assume a $2,000 traditional IRA contribution, the full $615 tax liability goes to zero.
How? The IRA deduction of $2,000 reduces the $618 tax liability to $418. The credit wipes out the remaining $418 in full, to result in a tax of zero.
In sum, it pays to put in a little extra effort to take advantage of tax savings to relieve some of the financial pressure that can prevent you from contributing to your IRA.
In 2027, the nature of the savers credit will change to a “Saver’s Match” thanks to the SECURE Act 2.0, making it even more valuable as a savings incentive.
DISTRIBUTED BY ANDREWS MCMEEL SYNDICATION