The government really wants you to save for your retirement. How badly do they want it? They'll actually reward you for saving your money for your own future. If you start saving for your golden years right now, the government will kick in with a contribution of its own that could be worth $1000. They won't give you actual money, of course; they'll give you tax benefits that could be worth that much.
All you need to do is to do to get the government to do this for you is an to make a contribution to a qualified retirement account - something like an individual 401(k), a traditional IRA or a Roth IRA.
Of course, getting a tax benefit out of the government isn't easy. You have to be the kind of person they're looking for. To begin with, you have to be someone who's completely independent - you can't be on someone else's list of dependents if you want this.
The money you make every year can't be above a certain limit, either. They change the number from time to time; right now though, if you're filing as a single individual, you can't make more than $27,750 a year.
Okay, let's say that you really are qualified. How much money do you think you'll make with your retirement savings contribution credit?
You can start working it out by getting the number for how much of a contribution you made to your retirement fund the year before. You need to start with that number (or $2000, whichever is smaller), and get to work with that. The worksheet on Form 8880 tells you how much of your contribution you will receive. The more you make, the less you get.
The IRS considers this a nonrefundable credit. You can't get more credit than what you actually owe the IRS. If you only owe $600 in taxes, it doesn't matter how much of a contribution you've made to your retirement fund - $600 is all you get. If your taxes are withheld by your employer even before your paycheck reaches you, the IRS will hopefully give you your retirement savings contribution credit in cash by adding it to your tax refund.
Even if you make too much money to qualify for the retirement savings contribution credit (lucky you), you can probably find someone you know who doesn't - a child who's just starting out in his career or something - and fill them in on how they can use this credit to afford a retirement account of their own.
All they need to do is to contribute whatever they can afford to an IRA. They'll get a tax refund very soon and they can use that to put into their IRA again.
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So now that you know how to get a tax credit on you retirement savings, you can also learn more about how to prevent paying more tax than you ought to when you draw on those savings.
To many people, working on their tax returns is the only time they ever pay serious attention to their finances. Around April every year, when a country full of poor poorly-organized individual taxpayers sit down and peer hopelessly at their financial documents to try to make some sense of them, they often come to the realization that there are quite a few mistakes they've made with regard to how their retirement savings plan is taxed that they need to correct; and that they aren't really using the best kind of planning they could.
Lots of Americans in the year 2010 discovered that they needed to take a required minimum distribution or an RMD, from their IRAs. Unless you had an arrangement with your custodian to have your RMD disbursed automatically, this rule would have been easy to forget about. That would especially have been so in light of the way the law never required it last year or the year before. People who forget to do this have to pay a 50% penalty. If you wish to avoid the penalty, you'll have to take your RMD and file form 5329 immediately and request a waiver of the penalty. The IRS is likely to view this sympathetically and not penalize you.
To most people, the idea of contributing to a 401(k) or an IRA retirement savings plan is something that they don't need to be sold on - it's a pretty obvious idea right there. Doing that lowers your taxes too. Most people forget that there's another benefit to doing this. Anything like this that you do that has the effect of shrinking your modified adjusted gross income has an effect on your Medicare part B premium. You get to save about $40 on your premium.
Savers credit can be an important thing to remember too. There are so many Americans today who diefer starting a retirement savings plan because they feel they just cannot afford it. Consider a married person filing jointly and declaring an adjusted gross income of $35,000. He gets savers credit worth $1000. And he also gets a deduction for whatever he contributes to an IRA retirement savings plan.
It makes a lot of difference, what kind of retirement savings plan you contribute to. Lots of people just carelessly go contribute to a nondeductible IRA when a Roth IRA would have been so much better. Now contributions to both kinds of retirement savings plan come out of your after-tax dollars. But the distributions you get from those accounts are treated completely differently by the IRS. With a Roth IRA, your distributions are tax-free.
It really matters how you set your retirement plan up. Do it wrongly, and you could lose thousands of dollars to unnecessary taxes.
We hope that this information was helpful to you and that you'll be able to make good use of your retirement savings contribution credit.