An added incentive to save—the saver’s tax credit
It can be tough to keep contributing to your employer-provided retirement plan. Groceries, gas and other living expenses can make a big dent in your salary, leaving little for retirement savings.
But before you stop or cut back (or never start) contributing to your plan, you should know that Uncle Sam can help you save for retirement through the Retirement Savings Contributions Credit, or Saver’s Credit, if you meet certain income requirements.
The credit repays a percentage of the contributions you make to your 401(k) or other retirement savings plan by reducing your income tax liability for the year. It is a percentage—50%, 20% or 10%—of up to $2,000 in qualified retirement savings contributions for a maximum credit of $1,000 (or twice that amount for a married couple filing jointly where each contributes $2,000).
The percentage depends on Adjusted Gross Income (AGI) and filing status. For 2024, if you are married and filing jointly, you will not be eligible for the credit if your AGI is above $76,500. The limit is $54,750 for head of household filing status and $36,500 for all other filing statuses. The credit is available for contributions to a 401(k), 403(b), governmental 457(b), SIMPLE IRA or salary reduction SEP plan, as well as for traditional and Roth IRA contributions.
An early start can make a huge difference
It’s not complicated: The earlier you begin saving for retirement, the better off you may be. Here’s why:
- Starting early gives the money you contribute to yourretirement plan more time to “compound.”Compounding is what happens when you earn moneyon the savings in your retirement plan, reinvest theearnings, and then earn money on your savings and yourearnings. Compounding gives you an increasing pool ofsavings that continues to be invested, creating what isessentially a “snowball” effect. The longer you save andinvest the better, since your money will have more timeto benefit from compounding.
- It is easier to save a little from each paycheck throughoutall of your working years than to attempt to save a largesum as you approach retirement.
- It is very likely that you will need much more moneyfor your retirement than your parents or grandparents.Better medical care, healthier eating habits and anunderstanding of the importance of exercise havehelped boost average life expectancies over the lastfew decades. That’s good news. It also means that youshould do what’s necessary to ensure that you’ll haveenough money set aside for what could be a verylong retirement. You don’t want to outlive your savings.
It’s easy to make excuses about why you can’t save for your retirement. However, it’s smart to step up and take charge of your future retirement security. The earlier you do that, all things being equal, the better off you will be.
The benefits of starting early
Julia waited until she was 45 years old before she started saving in her employer-provided retirement plan. She contributed $300 a month to the plan for 20 years, a total of $72,000. Alan began saving in his retirement plan at age 25, contributed $100 a month for 40 years, and contributed a total of $48,000. They both retired at age 60. Who had the bigger retirement nest egg?
|
| Julia | Julia | Alan | Alan |
|---|---|---|---|---|---|
| Monthly Contribution | Julia | $300 | Alan | $100 |
| Years Contributing | Julia | 20 | Alan | 40 |
| Total Contributed | Julia | $72,000 | Alan | $48,000 |
| Balance at Retirement* | Julia | $138,612 | Alan | $199,149 |
