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Remember that there are other financial and tax benefits for contributing to qualified plans and IRAs. So this is usually a good idea even if you don’t qualify for the retirement saver’s credit.
Dec. 27, 2022
If you’ve been toiling at a job for several years, you’ve probably have established a qualified retirement plan account where you work, such as a 401(k) plan or other qualified plan. And you may also have traditional and/or Roth IRAs in your name. So you could be set up well for retirement.
However, if you only recently entered the workforce, or you have a child who is just embarking on a career, you or your child may not be covered by a plan or IRA. In that case, you may benefit from the “retirement saver’s credit.” Thanks to this tax break, you can reduce your current tax bill by as much as $1,000 or $2,000 if you’re a joint filer.
The exact amount of your credit depends on a number of variables. Proposed legislation may change things, but here’s an overview of the current rules.
Basic premise: The credit isn’t automatic. You’re eligible to claim the credit only if you are age 18 or older; you’re not a full-time student; and you could not be claimed as a dependent by another person.
If you meet those eligibility standards, you must make a contribution to a retirement plan or IRA account. The credit is only available to contributors who fall under special adjusted gross income (AGI) thresholds. Those thresholds have been adjusted for inflation as follows:
Note that you must make the contribution to the plan or IRA out of your own pocket. In other words, you can’t roll over a contribution from another plan or IRA.
As long as you satisfy all these requirements, you can claim the credit on the tax return for the year of the contribution. But the tax math can be confusing. Essentially the credit is 50%, 20% or 10% of a maximum contribution of $2,000 ($4,000 if you’re a joint filer).
The chart below showing the AGI ranges for the 2022 and 2023 tax years.
Simplified example: Say that you’re a single filer and you earn $20,000 in your first year of employment If you contribute $1,000 to a 401(k) plan where you work, you qualify for a 50% credit, or $500. If you’re able to contribute $2,500, your credit would be limited to 1,000 because of the annual dollar cap.
Remember that there are other financial and tax benefits for contributing to qualified plans and IRAs. So this is usually a good idea even if you don’t qualify for the retirement saver’s credit. Your contributions can grow and compound over time without any current tax.
Isaac M. O’Bannon
Isaac M. O’Bannon
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