By Matthew Gaude & Shawn McGuire
When it comes to finances, there are two things many of us have heard over and over: save for retirement and minimize your taxes (which go hand in hand). Minimizing taxes now allows you to keep more money in your pocket and put more toward your future. Reducing taxes by strategically withdrawing your money in retirement allows your money to last longer. Today we’re going to share one way you can save for retirement and save on taxes at the same time: the Saver’s Credit.
What Is The Saver’s Credit?
If you’ve never heard of the Saver’s Credit, you aren’t alone. A recent study from the Transamerica Center for Retirement Studies® (TCRS) revealed that 38% of U.S. workers know about the Retirement Savings Contributions Credit, more commonly known as the Saver’s Credit. (1) Most of us tune out when we hear information about taxes and prefer to avoid the confusion taxes often bring, but in this case, listening up could benefit your financial situation.
In a nutshell, the Saver’s Credit is a non-refundable tax credit that may be applied up to the first $2,000 of voluntary contributions you make to your employer-sponsored retirement plan, such as a 401(k) or 403(b), your traditional or Roth IRA, or your ABLE account. (2)
What You Need To Know About The Saver’s Credit
Now, remember, you already receive favorable tax treatment by contributing to your retirement accounts. If you invest in a traditional IRA, 401(k), or other qualified plan, you save on taxes today by having that money taken out from your paycheck pre-tax, reducing your taxable income. If you use Roth versions of those accounts, you save in retirement by paying taxes today and withdrawing the money tax-free after age 59½.
What the Saver’s Credit does is optimize your finances by giving you a double tax benefit. As a reminder, a tax credit is an amount of money directly deducted from your federal income tax liability, increasing your refund or reducing how much you owe. Here are answers to some common questions.
Who Is Eligible?
The Saver’s Credit is available to workers 18 years or older who have contributed to a qualified employer-sponsored retirement plan, traditional IRA, Roth IRA, or ABLE account in the past year. To qualify for the credit, your adjusted gross income needs to be less than $32,000 (for 2019) or $32,500 (for 2020) for single tax filers. Heads of household need to have earned less than $48,000 (in 2019) or $48,750 (in 2020), and those who are married filing jointly need an AGI of less than $64,000 (2019) or $65,000 (2020). Unfortunately, full-time students or those claimed as dependents are not eligible for this credit.
Keep in mind, to qualify for the credit, you have to contribute new money. Rollovers from other accounts don’t count.
How Much Will I Get?
If you are a single filer, you will receive a maximum of $1,000, and if you are married filing jointly, (3) the maximum credit is $2,000. The amount you receive is based on how much you earn and how much you contribute. Simply put, the credit is worth 50%, 20%, or 10% of a maximum contribution of $2,000, or $4,000 if you are married filing jointly. Here’s the breakdown from the IRS.
For example, if you are married filing jointly with an AGI of $40,000 and you contributed $3,000 to your 401(k), you would receive 20% of that contribution, or $600.
Tips For Claiming The Saver’s Credit
For 2020, you have until July 15th (normally April 15th) to contribute to your retirement plans for 2019 and claim the credit on your 2019 taxes. Whether you file your taxes manually, using online software, or with a tax professional, make sure the credit is applied if you meet the eligibility requirements.
Here is a link to an infographic on The Saver’s Credit for the 2019 tax year and here is the link to the infographic for the 2020 tax year detailing eligibility, contributions eligible for credit and how much is the amount of the credit.
If you want to see more ways to optimize your saving and reduce your taxes, Live Oak Wealth Management would love to show you how. Call our office at 770-552-5968 or email firstname.lastname@example.org. Or, if you prefer, you can simply click here to schedule an appointment online.
Matthew Gaude is an *investment advisor representative and the co-founder of Live Oak Wealth Management, a financial services firm in Roswell, Georgia. He serves the planning and investment needs of corporate employees, those approaching or in retirement, and 401(k) plan sponsors. Working first as a commodity broker and then as a Business Development Manager for a national broker-dealer in previous jobs, he has the insight and experience to help clients understand the complexities of the market and implement strategies to minimize risk. To learn more about Matthew, connect with him on LinkedIn or visit www.liveoakwm.com.
Shawn McGuire is a financial advisor and the co-founder of Live Oak Wealth Management, a financial services firm in Roswell, Georgia. He serves the planning and investment needs of corporate employees, those approaching or in retirement, and 401(k) plan sponsors. He has worked in financial services since 2002 in positions ranging from financial advisor to stock broker and portfolio manager. As a CERTIFIED FINANCIAL PLANNER™ professional, he is trained to help clients with virtually all their financial needs. To learn more about Shawn, connect with him on LinkedIn or visit www.liveoakwm.com.
Securities offered through American Portfolios Financial Services, Inc., member FINRA/SIPC. Investment advisory services offered through *American Portfolio Advisors, Inc., a SEC Registered Investment Advisor. Live Oak Wealth Management, LLC is independently owned and not affiliated with APFS or APA.
Any opinions expressed in this forum are not the opinion or view of American Portfolios Financial Services, Inc. (APFS) or American Portfolios Advisors, Inc. (APA) and have not been reviewed by the firm for completeness or accuracy. These opinions are subject to change at any time without notice. Any comments or postings are provided for informational purposes only and do not constitute an offer or a recommendation to buy or sell securities or other financial instruments. Readers should conduct their own review and exercise judgment prior to investing. Investments are not guaranteed, involve risk, and may result in a loss of principal. Past performance does not guarantee future results. Investments are not suitable for all types of investors. Seek tax advice from a tax professional.