Do not forget that making contributions to IRAs and qualified plans has additional tax and financial advantages. Even if you don’t qualify for the retirement saver’s credit, this is usually a good idea.
An employer-sponsored qualified retirement plan account, such as a 401(k) plan or other qualified plans, is likely something you’ve set up if you’ve been working there for a while. Additionally, you might be the owner of traditional and/or Roth IRAs. As a result, you may be well prepared for retirement.
However, if you have a child who has just started working or if you have recently entered the workforce, you or your child might not be covered by a plan or IRA. In that case, you could qualify for the “retirement saver’s credit.” You could save up to $1,000 or $2,000 if you’re a joint filer thanks to this tax break on your current tax obligation.
Your credit’s exact amount will vary depending on a variety of factors. Here is a list of the current laws, though proposed legislation may alter them.
The basic premise is that credit is not given automatically. You can claim the credit if you are 18 or older, not a full-time student, and you are not claimed as a dependent by another person.
If you meet the eligibility requirements, you must contribute to a retirement plan or an IRA account. Contributors who meet certain adjusted gross income (AGI) thresholds are the only ones eligible for the credit. These thresholds have been inflation-adjusted as follows:
- $73,000 in 2023 for a joint filer (up from $68,000 in 2022).
- In 2023, a single filer will pay $36,500 (up from $34,000 in 2022).
The IRA or plan contribution must be made from your own funds, it should be noted. In other words, a contribution made to an IRA or another plan cannot be rolled over.
You can claim the credit on your tax return for the contribution year provided that you meet all of these requirements. But tax mathematics can be challenging. The maximum contribution is $2,000 ($4,000 if you’re a joint filer), of which 50%, 20%, or 10% can be claimed as a credit.
The AGI ranges for the tax years 2022 and 2023 are shown in the chart below.
|appropriate percentage||AGI in 2022 for single filers||AGI in 2023 for single filers||AGI in 2022 for joint filers||AGI in 2023 for joint filers|
|50%||$20,500 and below||$21,750 and below||$41,000 and below||$43,500 and below|
Example simplified: Assume you are a single filer who earns $20,000 in your first year of employment. If you contribute $1,000 to your employer’s 401(k), you will receive a 50% credit, or $500. Because of the annual dollar cap, even if you can contribute $2,500, your credit will be limited to $1,000.
Don’t forget that there are additional financial and tax advantages to contributing to qualified plans and IRAs. Even if you don’t qualify for the retirement saver’s credit, this is usually a good idea. Without any current tax, your contributions will continue to grow and compound.
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Who Qualifies for the Retirement Savings Credit...
[…] Do not forget that making contributions to IRAs and qualified plans has additional tax and financial advantages. Even if you don’t qualify for the retirement saver’s credit, this is usually a good idea.An employer-sponsored qualified retirement plan account, such as a 401(k) plan or other qualified plans, is likely something you’ve set up if you’ve been working there for a while. Additionally, you might be the owner of traditional and/or Roth IRAs. As a result, you may be well prepared for retirement. […]