As a piano teacher in Knoxville, Tenn., Jeannine Hines has almost nothing saved for retirement even though she's 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 saver's credit on her 1040 tax form.
Many Americans miss out on the saver's credit because they don't know it's 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 saver's credit.
While Hines is using the saver's 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 don't have to save frantically just before retirement. Financial planner Sophia Bera 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 that's too hefty, a smaller amount will also earn a saver's credit. It just won't 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.
The saver's 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.
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 — well below the $36,500 couples can have for the maximum credit. But because the government doesn't 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.