An Easy Way to Make the IRS Contribute to Your Retirement Account

Alamy Saving for retirement is tough, especially for those who have trouble making ends meet on a modest salary. But the federal government wants to help with a tax credit that’s worth as much as $2,000 to eligible taxpayers who make contributions to qualifying retirement accounts.

How the Savers Credit Works

The Savers Credit is designed to help taxpayers below certain income limits reduce their tax bills or boost their refunds when they save for retirement. The credit applies to the first $2,000 you contribute to a retirement account, or $4,000 for joint filers. With a maximum credit amount of 50 percent, that means that singles can get a credit of as much as $1,000, while joint filers can collect up to $2,000.

Just about every type of retirement account is eligible, including Individual Retirement Accounts and 401(k) plans, but also the 403(b) plans for school employees and those who work for tax-exempt organizations, as well as 457 plans for state and local government employees.

The Technical Details

The credit is available to single taxpayers with incomes up to $29,500 for contributions made for the 2013 tax year, and joint filers with incomes as high as $59,000. For tax year 2014, the eligibility thresholds rise by $500 for single filers and $1,000 for joint filers.

The amount of the match depends on where your income falls within these limits. For single filers making up to $17,750 and joint filers with income up to $35,500, the Savers Credit will give you 50 cents for every $1 you contribute to a retirement plan or IRA. If you’re single and earn between $17,750 and $19,250, or file jointly with income between $35,500 and $38,500, then you’ll only get a 20 percent match on your contributions. And those above the upper end of that range who still qualify for the credit get a 10 percent match. For the 2014 tax year, each of those breakpoints goes up by $250 and $500 respectively for singles and joint-filing taxpayers.

How the Savers Credit Works With Other Tax Benefits

In addition, the Savers Credit doesn’t take away any tax benefits of contributing to a retirement account. For instance, if you use a traditional IRA or 401(k) as your retirement-savings vehicle, then you’ll still be entitled to the ordinary deduction for the amount you contribute on your tax return.

It’s not too late to take advantage of the Savers Credit for 2013. You have until April 15 to make an IRA contribution for the 2013 tax year, and if you do, you can claim the Savers Credit on the 2013 tax return that you’re about to file. For 401(k) contributions and other employer plans, however, money needs to go in on or before Dec. 31 in order to qualify for a particular year’s Savers Credit.

The only problem with the Savers Credit is that it’s a nonrefundable credit. That means if your tax liability is less than the amount of your entitled Savers Credit, you won’t get the full credit. You also can’t carry any unused credit forward to future years; if you can’t use it all in that particular year, you lose what you don’t use.

Despite that shortcoming, the Savers Credit is still useful. By putting some extra money in your pocket, the IRS will make it worth your while to start putting money into a retirement account today. For more on the Savers Credit, check this page on the IRS website.

You can follow Motley Fool contributor Dan Caplinger on Twitter @DanCaplinger or on Google+.

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