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Gail MarksJarvis: Saverís credit helps low-income taxpayers save for retirement

McClatchy-Tribune Information Services

March 14, 2016


As a piano teacher in Knoxville, Tenn., Jeannine Hines has almost nothing saved for retirement even though sheís 60. So she was relieved when a financial planner told her Uncle Sam would give her money to save.

Under a little-known tax credit, Hines will get $766 from Uncle Sam instead of having to pay that to the government for 2015 taxes. To get the sum, however, financial planner Rose Swanger explained there were strings attached: Hines had to put money into an IRA or Roth IRA and claim the saverís credit on her 1040 tax form.

That was fine with Hines, since sheís been saving diligently for the last four years ó trying to do all she can to catch up for lost time.

"Being self-employed, and paying your own medical and your taxes, itís very tough to save," she said. "$766 is valuable on a limited income."

Many Americans miss out on the saverís credit because they donít know itís available. But it is aimed at making it easier for people with low or moderate incomes to stash away something for the future. They can get a maximum of $1,000 back from the government, depending on their income and how much money they put into a retirement account.

Besides IRAs, people who put money into 401(k)s or any retirement savings plan at work can also get help with saving if they claim the credit, provided their income is low enough. Small-business owners can use SEP IRAs or SIMPLE IRAs and claim the saverís credit.

While Hines is using the saverís credit to help catch up after years of missing out on saving, financial planners are pushing millennials to use the government money while young so they donít have to save frantically just before retirement. Financial planner Sophia Bera of Gen Y Planning tries to talk millennials with modest incomes into putting at least $2,000 into retirement accounts each year so they can get the maximum credit of $1,000.

That means saving about $38.50 a week. If thatís too hefty, a smaller amount will also earn a saverís credit. It just wonít be as large as if a person stashed away the full $2,000 a year. According to the Internal Revenue Service, the average credit for couples was $216 in 2011; for singles it was $128.

Bera recently worked with a 25-year-old who had inherited $25,000 from his grandfather, which gave him the ability to save more than ordinarily would have been comfortable on his $25,000 salary. He had no 401(k) at work, so Bera instructed him to put $5,500 into a Roth IRA for 2015 and another $5,500 for 2016. He will get back $200 for each year from the saverís credit based on his income and the fact that he put at least the $2,000 maximum into a retirement saving account.

If he keeps putting $5,500 away for retirement every year and earns on average 7 percent a year in a balanced mutual fund of stocks and bonds, he should have more than $1.3 million by retirement. If he had merely saved the $2,000 maximum for the saverís credit, he would have arrived at retirement with $494,000 ó a nice sum, but far less than $5,500 a year earned.

The saverís credit is available to individuals with adjustable gross income less than $30,500 and couples up to $61,000. At those maximum levels of income, however, taxpayers only get 10 percent of what they save. With a $2,000 ceiling on savings, the 10 percent saverís credit amounts to $200, or the amount Beraís 25-year-old client received for the first $2,000 of his total $5,500 Roth IRA contribution.

To get the maximum credit of $1,000, or 50 percent of a maximum $2,000 investment in an IRA or 401(k), singles will qualify with incomes up to $18,250. See irs.gov and use Form 8880 to claim the credit.

Hines qualified for the full $1,000 credit because she and her husband combined had an adjustable gross income of about $19,000 ó well below the $36,500 couples can have for the maximum credit. But since the government doesnít give back more than a taxpayer owes each year, she received $766 from the credit.

In other words, the government gave her back $766 so she could save at least $2,000 for retirement. Instead of having to come up with a fresh $2,000 in cash to save, the credit paid some and she only had to come up with $1,234 out of pocket.

People who find themselves close to the maximum income cutoffs shouldnít give up on the saverís credit without first trying this technique: Lower your income below the cutoff by contributing to a taxable traditional IRA. Then apply the saverís credit.