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IRS tax credit rewards savers with low incomes

By Gail MarksJarvis, Chicago Tribune, Source: MCT News Service

If you can barely scrounge up enough cash to pay the bills, saving for retirement might be relegated to your good-intentions list.

But with the nation deeply in debt and concerns mounting about Social Security and Medicare, Americans are going to need more than good intentions to secure their future. And your tax return, of all places, might help you get there. .

Buried deep within the tax forms is a treat for those who think they can't afford to save. It's called the Saver's Credit and provides up to $1,000 from the government to put in an IRA or Roth IRA for those who qualify.

If your income is low enough, and you put any money into a 401(k), 403(b) or other retirement savings plan at work in 2009, you might qualify. Use IRS Form 8880.

Though the full $1,000 credit is available to single people with income of $16,500 or less who contribute at least $2,000 to a retirement savings account, singles making up to $33,000 can obtain smaller credits. You don't need to save $2,000, but the largest credit comes if you do.

For married couples, the credit disappears when they make more than $55,501, and the maximum is available with income of $33,000 or less. If each spouse saves $2,000 in an IRA or 401(k), they can get up to $2,000.

Through deductions and funding IRAs, individuals can lower their income to within the technical "adjusted gross income" requirement and qualify for the credit. Financial planners who are savvy with the Saver's Credit will often have people submit their tax return, say they are opening an IRA or Roth, and then fund it with their refund that includes the credit, if they get their refund and deposit it in the IRA by April 15.

If you use Tax Act or Turbo Tax, which are available free at www.irs.gov, the software will do the calculations so you can see what credit amount is possible. Also, free tax clinics are available through the IRS Volunteer Income Tax Assistance Program (800-829-1040) or AARP (888-227-7669).

Make sure any tax preparer you use knows about the Saver's Credit. And do not pay any preparer to get your refund early.

The credit was established to provide incentives to save, because Americans typically fall far short of saving what they will need for retirement. Half of Americans between 55 and 65 have saved less than $80,000. Yet, Social Security pays less than $1,200 a month, on average

As individuals have lost jobs, or worried they might, they have been less inclined to save for retirement. Only 49 percent of workers are saving through 401(k)-type plans, down from 55 percent in 2008, according to the American Savings Education Council.

But people are concerned about their lack of saving. In a recent survey, the council found 77 percent of low-income and 54 percent of moderate-income households said they were not saving enough for retirement and knew their standard of living would suffer in retirement.

People who fear losing access to their money can use the credit to fund a Roth IRA, from which they can make withdrawals at any time and for any reason without being penalized. So the funds deposited, but not the earnings, are available if they lose their job or have a household emergency. If the $1,000 deposited grows to $1,100, they can remove the $1,000, not the $100.

IRAs and 401(k) accounts do not provide such flexibility. Still, given the fact that it takes years of saving to accumulate what's needed for retirement, it is best not to tap any retirement savings early.

The federal government claims that many eligible people do not use the Saver's Credit because it is complicated.

The Obama administration is proposing rules so it would be easier to calculate. In addition, people currently cannot qualify for the credit if they don't owe any taxes, but the Obama proposal would change that. It also would raise the income eligibility to $65,000 for couples, $48,750 for a single parent caring for children and $32,500 for singles.

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ABOUT THE WRITER

Gail MarksJarvis is a personal finance columnist for the Chicago Tribune and author of "Saving for Retirement Without Living Like a Pauper or Winning the Lottery." Readers may send her e-mail at gmarksjarvis@tribune.com.

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