Retirement planning: It pays to earn tax credits
The IRS offers credits to save more for your retirement.
The average American can expect to spend roughly 20 to 30 years in retirement. However, several unsettling facts about retirement savings were revealed in the 2016 Retirement Confidence Survey. In 2014, 30 percent of private industry workers with access to a defined contribution plan (such as a 401(k) plan) did not participate. Of workers with some retirement savings, 54 percent had less than $25,000 and 26 percent had less than $1,000.
Furthermore, the survey found that less than half of Americans have calculated how much they need to save for retirement. These reports show a considerable gap between workers’ expectations and retirees’ experience about leaving the workforce. Retiring earlier than planned may be due to unexpected downsizing, health issues, or caregiving choices. Preparing for retirement can become a great habit. To promote this, the IRS has incentives such as tax credits. Check with the IRS for current dollar amounts of what you can contribute to 401(k), 403(b) and most government plans. If you are 50 and older, you can add more toward catch-up contributions. If you're lucky enough to have a generous employer matching your 401(k)-type plan or are self-employed, the maximum that can be contributed annually are substantially larger.
For a traditional IRA, you can deduct contributions if they were not covered by a retirement plan with your employer up to certain dollar limits.
The IRS has income limits for those who contribute to both a traditional IRA and a workplace retirement plan (or those whose spouses have access to a workplace plan), as well as the income limits for those who contribute to Roth IRAs.
If you contributed up to $2,000 in your retirement plan or IRA, middle and low income earners could qualify for a Saver’s Credit. Plan ahead for this by including regular amounts automatically deposited into your retirement accounts, depending on your Adjusted Gross Income (AGI).
Take the time to understand your retirement plan tax credits for filing your income tax return and consider your future goals. Tax time is also a good time to do a financial check-up, including your retirement planning. Be sure to check out MIMoneyHealth.org for great tips on many financial topics plus programs in the Events column.