There are many benefits you can get from saving in a retirement account. However, there is an extra one many taxpayers don’t know about, the Saver’s Credit. That’s why in this article, we are going to tell you how your Retirement Saving Account can be tax-deductible through this incentive. Plus, we will explain how to find out you are eligible and how to claim it.
Before we get started, you need to understand what an Individual Retirement Account (IRA) is. An IRA is a tax-advantaged account that is commonly used to save for your retirement. Some people even use this account for investment. Keep in mind that there are several types of IRAs such as traditional, Roth, SEP and SIMPLE. The difference among all these accounts is that some are not tax-deductible. Plus, others are exclusively for small businesses.
These IRAs are usually found in the United States but don’t worry, in Canada, there is a similar version, the Registered Retirement Savings Plan (RRSP). Don’t forget that even though these accounts are different, they have important similarities. For instance, the contributions to both are tax-deductible, the funds you have in the account will be tax-sheltered, and after you hit the age limit, the money will have to be withdrawn.
In some cases, people decide to withdraw early, but that is not recommended, since you will lose the contribution room. If you want to learn more about this matter, click here.
It is crucial to understand how retirement savings accounts work since they are the ones where you can get Saver’s Credit. Now let’s take an in-depth look at this incentive.
Saver’s Credit: What is it?
This is a non-refundable tax credit that income taxpayers can have access to as long as they are saving for retirement. Keep in mind that these Saver’s Credit only applies to certain accounts, such as the IRA. According to your income level, the percentage of credit can be 10%, 20% or 50%. Here is a simple breakdown that will help you understand this concept better.
When it comes to single filers, they will have access to a 50% credit when their adjusted gross income is $19,500 or less. In case, their income is anywhere between $19,501 and $21,250, the tax credit will be 20%. Finally, if they are in the highest-earning level ($21,251-$31,500), they can claim a 10% credit.
Head of Household
When you are head of household, the income levels change as well as the percentages. For instance, if your gross compensation is $29,250 or less, you can ask for a 50% credit. In case you have earned between $29,251-$31,875, the tax credit will be 20%. To end up in the 10% category, you’ll need to have a high income ($31,876-$48,750).
This refers to married people who file joint statements. In this case, they can claim a 50% credit when their income is equal to $39,000 or less. If the sum-up of their earnings is between $39,001 and $42,500, the credit will be 20%. Or if they are in the highest level of compensation ($42,501-$65,00), they can access a 10% tax break.
As you might have noticed, the higher your income level, the less credit you will have access to. With that said, when you do the math, the maximum claiming amounts are $200, $400 and $2000. Don’t forget that this will apply to the tax you owe. You can’t claim this money.
How to find out if you are eligible
If you want to take advantage of the Saver’s Credit, there a couple of requirements that you must meet. First, you need to be 18 years or older and not be dependant on someone else’s tax return. Plus, you can’t be a full-time student. You will be considered as a student if, at any point of the tax year, you were enrolled in a full-time program, or training of any kind. Keep in mind that in this category, job-related training is not included.
Further, on the tax return year, you need to contribute to your retirement account. Additionally, you need to meet all the income requirements that we explained in the section above.
When is Saver’s Credit not applicable?
Even though for most retirement savings you will be eligible for Saver’s Credit, there are some special instances where that is not the case. First, if you contribute more than the allowed limit, the exceed needs to be divested. Then, that portion of the contribution can’t access the Saver’s Credit.
Also, if you change jobs and decide to take out the money from an employer sponsor account to a personal retirement saving one, the contribution would be ineligible. That’s why whenever you think about making changes to your retirement savings account, you should find out how it affects you.
Claiming Savers Credit
To claim Savers Credit, you will need to ask your financial advisor for a form. You will have to fill it out and wait for it to be reviewed. If you are worried about what to write down, don’t worry. Usually, this form comes with easy instructions you can follow. Before you do this process, remember to check out if you are eligible. Plus, how much credit you will have access to.
Why should I take advantage of the Saver’s Credit?
The Saver’s Credit is an incentive that can reduce a great amount of your tax burden. This will be something added to the tax deduction you will have for contributing to the plan. This means the credit will help you reduce the taxes you owe after the deduction is applied.
We recommend every taxpayer to find out if they are eligible for Saver’s Credit because, in the best-case scenario, you won’t have to pay any taxes. This means when you retire, you will end up with a higher amount of funds. However, if you are not planning on stop working just yet, thinking about the Saver’s Credit at the end is a motivation to start saving up.