By Sarah Brenner, JD
Director of Retirement Education
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For those just starting out, saving for Retirement can be challenging. For young workers, paying the rent and buying the week’s groceries may take priority and there is only so much money to go around. However, there is an often-overlooked tax break that may make saving for Retirement more attractive.
Many people are unaware of the Saver’s Credit. You are eligible for the credit if you are age 18 or older, not claimed as a dependent on another person’s return, and not a student.
The tax credit is available to lower-income workers who make IRA contributions or contribute to an employer plan. The maximum contribution amount eligible for the credit is $2,000. Since the maximum credit rate is 50%, an IRA owner or plan participant can potentially reduce tax liability by up to $1,000. Rollover contributions do not qualify for the credit. The credit is nonrefundable which means it cannot reduce your tax liability to less than zero. Also, it may be reduced by any recent distributions you received from your Retirement plan or IRA. The Saver’s Credit can be a double tax break because it is available in addition to any deduction in income that may be available for a Retirement savings contribution.
Here is how a parent or grandparent can help a younger worker who may need every cent of income to a pay the bill. They can help a cash-strapped young saver take advantage of the Saver’s Credit by funding an IRA contribution for their child or grandchild. As long as the young worker has earned income, it does not matter if someone else gives her the money to fund the contribution.
Example 1: Emma, age 25, has been working hard to get her new business off the ground. Her earnings from self-employment for 2020 were $15,000. Her dad, Marcus, funds a traditional IRA contribution of $6,000 for Emma. Emma can deduct her IRA contribution and claim a Saver’s Credit of $1,000 on her 2020 tax return.
Example 2: Aiden, age 22, landed his first job at the end of 2020. He earned $10,000 in 2020. His grandfather, Ike, would like to help get Aiden started with his Retirement savings. He can give Aiden $6,000 to fund his Roth IRA. Aiden would qualify for the Saver’s Credit of $1,000.