You May Be Able To Get $226K in Free Retirement Money: Here’s How
Most investors are aware of the immense benefits of tax-deferred retirement accounts, such as IRAs and 401(k) plans. In addition to potentially receiving a tax deduction on your contributions, your investments will grow tax-deferred until you withdraw the funds. In the case of a Roth IRA, you may forgo the initial tax deduction but you’re rewarded at retirement with tax-free withdrawals. But what if you could amp up your tax savings by 10%, 20% or even 50% every year you make a retirement plan contribution? For certain eligible taxpayers, those savings are readily available, thanks to an often-overlooked IRS tax benefit known as the retirement savings contribution credit.
What Is the Retirement Savings Contribution Credit?
The retirement savings contribution credit grants a tax credit for certain eligible contributions to an IRA or employer-sponsored retirement plan, such as a 401(k). Specifically, the credit applies to qualifying contributions to the following plans, per the IRS:
- Traditional or Roth IRAs
- Salary deferrals to a 401(k), 403(b), governmental 457(b), SARSEP or SIMPLE plans
- After-tax employee contributions made to a qualified retirement plan; this includes the federal Thrift Savings Plan and 403(b) plans
- 501(c)(18)(D) plans
- ABLE accounts for which you are the designated beneficiary
Who Is Eligible for the Saver’s Credit?
There are two categories of eligibility requirements for the saver’s credit. First, you must be at least 18 years old, not claimed as a dependent and not a student. Second, you must meet the income requirements, as outlined below.
What Is the Maximum Amount of the Saver’s Credit?
The saver’s credit is limited to a maximum of $1,000, or $2,000 for joint filers. The amount of the credit is equal to 50%, 20% or 10% of the amount of your contributions, based on your adjusted gross income. But you don’t have to only enjoy the $1,000 or $2,000 you get — keep reading to find out how that can end up as more than $226,000.
What Are the AGI Limits To Qualify For the Saver’s Credit?
Here are the AGI limits for tax years 2020 and 2021, by filing status:
Married Filing Jointly
- 50% credit: $39,000 or less for 2020, $39,500 or less for 2021
- 20% credit: $39,001-$42,500 for 2020, $39,501-$43,000 for 2021
- 10% credit: $42,501-$65,000 for 2020, $43,001-$66,000 for 2021
- 0% credit: More than $65,000 for 2020, more than $66,000 for 2021
Head of Household
- 50% credit: $29,250 or less for 2020, $29,625 or less for 2021
- 20% credit: $29,251-$31,875 for 2020, $29,626-$32,250 for 2021
- 10% credit: $31,876-$48,750 for 2020, $32,251-$49,500 for 2021
- 0% credit: More than $48,750 for 2020, more than $49,500 for 2021
All Other Filers
- 50% credit: $19,500 or less for 2020, $19,750 or less for 2021
- 20% credit: $19,501-$21,250 for 2020, $19,751-$21,500 for 2021
- 10% credit: $21,251-$32,500 for 2020, $21,501-$33,000 for 2021
- 0% credit: More than $32,500 for 2020, more than $33,000 for 2021
How You Can To Turn the Saver’s Credit Into $226,000
The saver’s credit alone won’t translate into $226,000 in extra retirement savings. However, if you use the credit properly, you could very well generate that much in additional savings in your retirement nest egg.
Take the example of a married couple filing joint taxes and claiming the full $2,000 credit for 30 years. If you invested that $2,000 at the end of every year and earned a return of 8% per year, after 30 years your account would be worth $226,566.42.
This is an astonishing sum for what amounts to free money from the government. But that’s not even the best part. Remember that this princely sum is in addition to the money that you would also have by virtue of making maximum retirement contributions for 30 years. To earn the $2,000 per year in tax credits, you would have to contribute $4,000 per year to your retirement account, if you qualified for the 50% credit. If you earned the same 8% annual return on those investments, your retirement account would reach $453,132.84. Coupled with the extra money from your tax credits, your total nest egg would be $679,699.26. Not bad for putting just a few hundred dollars per month into your retirement account.
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