If your family is in a middle-to-lower income bracket, you may be eligible for an amazing tax credit called the Credit For Qualified Retirement Savings Contribution, often called the Saver's Credit. This credit gives you back a portion of any qualified retirement savings contributions you make during the year. Qualified retirement savings programs include the Thrift Savings Plan (TSP), Individual Retirement Arrangements (IRAs), and 401(k)s. This credit may give you back up to 50% of the money you save for retirement, depending on your filing status and income level.
What's This Got To Do With The Earned Income Credit?So why did I put Earned Income Credit (EIC) in the title of this post?
First, because there is an unintentional relationship between the EIC and the Saver's Credit. First, eligibility for the EIC is a clue that you might be eligible for the Saver's Credit. There isn't a direct overlap between the two groups - some people may be able to take the EIC and not the Saver's Credit, and some people may be able to take the Saver's Credit but not the EIC. But eligibility for one of the credits means your roughly in the right income bracket to be eligible for the other one, and you should take a minute to check.
Second, depending on your individual situation, contributions to a pre-tax retirement account may make you eligible for a larger EIC, giving you a double tax bonus. And because the EIC is refundable, meaning you get the credit even if you pay no taxes, saving for retirement could mean more money in your pocket at tax time.
But I Can't Afford To Save!On some level, that's the entire point of this credit - making it cheaper for you to afford to save. Think of it like a sale on retirement money. If you're in the highest credit level, 50%, this credit lets you purchase retirement money at half-price; more if you can combine it with a higher earned income credit. I can't think of any more compelling way to convince you to find a few dollars to contribute to a retirement account.
How Much Can I Get?For the Saver's Credit, the credit will be the credit is 50%, 20% or 10% of the first $2,000 of your retirement plan or IRA contributions($4,000 if married filing jointly), depending on your adjusted gross income (AGI.)
Plus, as discussed above, your Earned Income Credit may be increased, depending on your particular situation.
The WarningsThe Saver's Credit is a non-refundable credit, meaning it can not reduce your tax liability below zero. If you're already paying very low taxes, you may not be able to take the full credit. If you are one of the 45% of people who don't pay any income taxes at all, this credit isn't going to help you.
Also, because of the way that the EIC works, there is a very slim chance that you might actually get a lower EIC if you contribute to a pre-tax retirement account.
While I (almost) always encourage retirement savings, you should verify your specific tax situation before making any decisions based solely on the tax implications. Little nuances and small changes in income can have a large effect on your end result. If you don't feel confident enough to figure this out on your own, check with the personal financial specialists available at your base family support center.