Millions of Americans suffered lost or cut wages in 2020 — but depending on how low their income was, they may qualify for a little-known tax credit if prior to the loss they saved at all for retirement.
Retirement Tip of the Week: If you were a low earner in 2020, as deemed by the federal government, claim the Retirement Saver’s Credit when filing your taxes this year.
The Saver’s Credit, also known as the Retirement Savings Contributions Credit, is available to individuals who contributed to a traditional or Roth individual retirement account or made a contribution to their 401(k), 403(b), 457(b), SARSEP or SIMPLE account. They must be 18 or older and not claimed as a dependent on another person’s tax return. Students with ABLE accounts (Achieving a Better Life Experience) also qualify for the credit now.
“The Saver’s Credit is almost like a secret,” said Rose Swanger, principal of Advise Financial. “Unless you know about it or purposefully ask clients if they made any IRA or 401(k) contribution to their retirement account last year, most tax preparers don’t make the inquiry and clients don’t volunteer that information.”
There are confining income limits. Taxpayers who are married filing jointly get a credit worth 50% of their contribution if their adjusted gross income in 2020 was no more than $39,000, down to 10% of their contribution if they earned between $42,501 and $65,000, according to the Internal Revenue Service. Heads of Household must not have earned more than $29,250 for 50% of their contribution, or between $31,876 and $48,750 for 10%. Single and other filers can’t have earned more than $19,500 for the 50% credit or between $21,251 and $32,500 for 10%.
For example, Mr. X earned $60,000 in 2020 but his wife, Mrs. X, was unemployed last year. If they file as married filing jointly and contributed $6,000 to an IRA, the couple would get a $600 credit. A single filer who earned $19,500 and contributed $1,000 to a 401(k) before they were let go would get $500. Credits are worth more to low-income workers than deductions because they are worth a dollar for dollar (as opposed to a deduction, which is a percentage).
Source: Internal Revenue Service
The income limits were adjusted for inflation for 2021.
Source: Internal Revenue Service
Restrictions do continue, however. To be eligible, savers must have contributed to their retirement accounts — but in order to do so, they need access to an employer-sponsored account or had earned wages to contribute to an IRA. Unemployment does not qualify as earned income, said David Haas, owner of Cereus Financial Advisors.
But there’s a twist. Although it’s too late to contribute to a 401(k) or similar plan in 2020, it isn’t too late to fund an IRA for last year. The deadline to contribute to an IRA for any given tax year is the tax filing deadline of the following year (ie. someone who wants to fund an IRA for 2020 has until April 15, 2021 to do so).
Contributing to a retirement plan during a wage loss may not be possible for everyone. “While this is a great benefit, many low-income workers are already behind on rent, car payments, a mortgage, etc.,” Haas said. “For those who have fallen behind, you need to evaluate whether it would be better to pay your bills rather than contribute toward a retirement plan.”
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February 23, 2021 at 01:29AM
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Low-income earners and those with lost or cut wages in 2020: Don’t forget this tax credit - MarketWatch
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