Free Money! Which, sadly, only 25% of those eligible are taking…

Now that I have your attention, let’s try that again.

Free Money!

What we’re talking about here is the “Retirement Savings Contributions Credit”.  It was first created as part of the 2001 tax cut package called the “Economic Growth and Tax Relief Reconciliation Act of 2001” and was made permanent as part of the 2006 Pension Protection Act, which also indexed the eligible income levels to inflation.

And it is, indeed, simply free money — to those who are eligible.  The Saver’s Credit as it’s also called, may entitle a taxpayer to up to a $1000 tax credit.  And remember — a tax credit is much more valuable than a tax deduction since it reduces the amount you owe in taxes dollar-for-dollar.

The way it works, though, is that you have to make contributions to your own retirement savings, and you have to have a low enough income to qualify.

Depending on your income level (and your tax filing status – single vs. married, etc.), either 50% or 20% or 10% of whatever you put into your retirement savings will be given back to you as a tax credit, and it applies to the first $2000 (or for married folks, up to $4000) of such savings.

The 50% threshold is fairly low — if your Adjusted Gross Income (AGI) is below $36,000 (2014, married filing jointly) or $18,000 (2014, single), you get 50% of the first $4000 or $2000 you put into an IRA, 401k, 403b, SIMPLE IRA, SEP, or Roth IRA.

There’s a fairly steep phaseout, though, and no credit is available to folks whose AGI is over $60,000 (2014, married) or $30,000 (2014, single).

Unfortunately, it appears that only one in four who are estimated to be qualified (i.e., by earnings level) to take this free money are actually doing it.  (per a study by the Transamerica Center for Retirement Studies).

And it’s not clear that the problem is that they can’t afford to take it (though that may well be the case for some — if you’re only making a little bit, just getting by, it’s awfully hard to put much into retirement savings).  The Saver’s Credit is simply not that well known.

So I’m shouting it today, as loud as I can.  There is free money to be had!  Take it if you can!

The tax form used to compute and claim the credit is Form 8880.  You can see it here:  <http://www.irs.gov/pub/irs-pdf/f8880.pdf>

And, since I’m writing this in March, 2015, there’s still time to take this credit for your 2014 filing year!  If you are eligible, you may make an IRA contribution for 2014 all the way until you file your 2014 taxes, which means until April 15, 2015.  If you can, make that IRA contribution and get your free money!

Oh, and one more thing.  If you’re employed and have an employer-based retirement plan, even if you don’t qualify for the Saver’s credit, your employer may match some percentage of contributions you make to your retirement plan.  If you’re not sure whether that’s the case or not — call your HR department today and check.  Because as valuable as the Saver’s Credit can be, it’s simply not available to everyone, but there are no income limits which apply to employer match money in your 401k and if you’re not collecting every penny of employer match, you’re leaving even more free money on the table.  So make sure to take advantage of employer’s matching contributions to your 401k, too!

[2015 Update: The thresholds have been adjusted for inflation – for Married Filing Jointly, your AGI needs to be below $61,000 to take the credit, and for Singles, the cutoff is $30,500.  But this credit is still available and you have until you file your 2015 taxes – by April 15, 2016 – to take advantage of this by making contributions to an IRA if you haven’t already made your 2015 IRA or 401k contributions.]

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