Hidden Treasure: Why Modest-Income Taxpayers Should Learn About the Saver's Credit

By Alert Investor Markets Fool.com

Saving for retirement can be hard, and that's especially true for those earning a modest income. Fortunately, there are tax breaks out there to reward those who prioritize such savings.

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The Retirement Savings Contribution Credit, also known as the Saver's Credit, is a special tax break aimed at encouraging low- to moderate-income taxpayers to save for retirement. Depending on your adjusted gross income, tax filing status, and other factors, you may be able to claim a tax credit for a portion of the first $2,000 you contribute to a retirement account during the year. This credit isin additionto the tax advantages you receive when you contribute to IRAs, 401(k)s, or other tax-advantaged retirement plans.

"The Saver's Credit is a wonderful thing for low to moderate income individuals or couples," said Diane Oakley, executive director of the National Institute on Retirement Security.

"It helps people understand they can save, and they will get something from it," added Cindy Hounsell, president of the Women's Institute for a Secure Retirement.

For those who are eligible, the Saver's Credit could amount to free money -- but many simply don't know about it. Just 25% of American workers with annual household incomes of less than $50,000 are aware of the credit, according to a recentstudyconducted by the Transamerica Center for Retirement Studies.

As we approach tax season, now is a good time to learn about the Saver's Credit. Here are the answers to some important questions.

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What exactly is the Saver's Credit?

The Saver's Credit is atax creditavailable to qualifying low- to moderate-income taxpayers who voluntarily make contributions to an IRA, amyRA(a retirement account sponsored by the U.S. Department of Treasury), or a workplace-sponsored retirement plan such as a 401(k).

Rollover contributionsare not eligible for the Saver's Credit. In addition, your eligible contributions might be reduced by any recent distributions you received from your retirement account.

The Saver's Credit is "nonrefundable," meaning it can reduce the amount of taxes you owe, but it cannot provide you with a tax refund if you don't owe anything on your taxes.

How much is the credit worth?

For tax year 2016, the credit can be worth as much as $1,000 for an individual and $2,000 for married couples.

The amount of the credit you receive is based upon how much you contribute to a retirement account and your "credit rate." Yourcredit ratecan be 50%, 20%, or 10% of your retirement account contributions, and the credit maxes out at $2,000 ($4,000 if you're married filing jointly), depending on your adjusted gross income.

For example, take Tanya, a single worker making $25,000 a year. If Tanya contributed $1,250, or 5% of her salary, to a retirement account, she could receive a 10% credit on that amount, or $125, on her federal income taxes.

Who is eligible for the Saver's Credit?

You must be 18 or older. You cannot be a full-time student or be claimed as dependent on another person's return.

For the 2016 tax year, your income must have been below $30,750 if you are single or $61,500 if you are married filing jointly. For 2017, the thresholds have increased to $31,000 and $62,000, respectively.

What is the deadline for making a contribution to a retirement account and having it count toward a Saver's Credit on my 2016 tax return?

You have until April 18, 2017 to receive the Saver's Credit forcontributing to an IRA or a myRA, assuming you qualify.

The deadline for contributing to a 401(k) for tax year 2016 was Dec. 31, 2016. However, think about making contributions during 2017, which might allow you to claim the Saver's Credit for the current tax year.

What do I have to do at tax time to claim the Saver's Credit?

In order to claim the Saver's Credit, you must file your taxes with Form 1040, 1040A, or 1040NR. The credit is not available if you file your taxes using the 1040 EZ form.You also will have to fill out Form 8880, the "Credit for Qualified Retirement Savings Contributions" form.

Claiming the Saver's Credit requires your commitment to save for retirement, as well as some additional work at tax time.But the payoff -- a more secure retirement, plus a possible tax break -- might be more than worth the effort involved.

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