“SAVER’S CREDIT” MAY PROVIDE EXTRA INCENTIVE TO FUND IRA
You might think that, by now, everybody had an individual retirement account (IRA). But it’s not true – in fact, as of June 2003, about 41 percent of U.S. households own IRAs, according to the Investment Company Institute. That means there’s a lot of people who aren’t taking advantage of one of the best retirement savings vehicles available. And by not contributing to an IRA, some of us may even be tossing away a valuable tax credit.
Before we look at that credit, let’s quickly review the ”basics” of an IRA. In 2003 and 2004, respectively, you can contribute up to $3,000 to either a Traditional or Roth IRA (income limits apply) or a combination of both; if you’re 50 or over, you can put in up to $3,500. If you invest in a Traditional IRA, your contributions may be tax deductible, depending on your income level, and your earnings grow tax deferred. If you own a Roth IRA, your contributions are never deductible, but your earnings grow tax free, provided you don’t start taking withdrawals until you’ve reached age 59-1/2 and you’ve held your account for at least five years.
Furthermore, you can invest your IRA dollars in virtually any type of investment you want: stocks, bonds, certificates of deposit, etc.
So, with all the benefits offered by an IRA, why do so many people still not have one? It’s a difficult question to answer. But recent tax law changes may now give you an added incentive, in the form of a tax credit known as the ”Saver’s Credit.”
To qualify for this credit, your adjusted gross income must be below $50,000 if you file a joint return, $25,000 if you’re single and $37,500 if you file as ”head of household.” So, you may well qualify for the credit if you are in the 15 percent tax bracket. The credit is between 10 percent and 50 percent of your contribution, depending on your income. Only the first $2,000 of your contribution qualifies for the credit, so the maximum benefit will be between $200 and $1,000 per person.
Keep in mind that this is a credit, not a deduction; every dollar of your Saver’s Credit will lessen the tax you owe by one dollar. Consequently, if you don’t claim this credit, you will literally be taking money out of your own pocket.
The tax law that created the Saver’s Credit was specifically designed to help people at your income level build resources for retirement. And you can also benefit from the tax law changes of 2003, which, among other things, reduced personal income tax rates.
For example, if you earned $50,000 in 2002, and you’re married and filing jointly, you would have been in the old 27 percent bracket. But now, thanks to the new tax laws, that same $50,000 would put you in the 15 percent bracket. That means you’ll have more ”take-home” pay, some of which you could use to help fund your IRA — and thereby qualify for the Saver’s Credit.
If you don’t have an IRA yet, you’ve got until April 15, 2004, to establish one. And if you miss out on this year, you won’t have too many more chances to get the Saver’s Credit, because it is slated to expire after 2006.
Here’s one final word about the Saver’s Credit: It’s not just for IRAs. If you choose, you can use the credit for your 401(k) or other employer-sponsored retirement plan.
However, you can’t claim two full credits in the same year.
If you qualify for the Saver’s Credit, put it to work right away. It’s one more good reason to contribute to a retirement plan.
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