If you have a child graduating from college this year, money can be tight as he or she embarks on a career. So it's often hard to convince your child to set aside money for a retirement date that may be more than 40 years away.
Nevertheless, the sooner a new wage-earner can start saving for retirement, the better, especially when you consider the benefit from tax-deferred compounding within a qualified retirement plan, like a 401(k), or an IRA. What's more, to your child's surprise, he or she may be eligible for a little-known tax credit.
This tax break is called the retirement saver's credit. As you might think, it may be claimed for your contributions to a qualified retirement plan or IRA. But only the first $2,000 of your annual contribution counts toward the credit if you're a single filer ($4,000 for joint filers).
How much is the credit? That's tricky because the credit percentage depends on your adjusted gross income (AGI) for the year. For instance, the credit percentages for single filers who make a contribution for 2017 are as follows:
- If your AGI is $18,500 or below, the credit percentage is 50%.
- If your AGI is between $18,501 and $20,000, the credit percentage is 20%.
- If your AGI is between $20,001 and $31,000, the credit percentage is 10%.
Thus, a single filer with an AGI of $30,000 in 2017 is limited to a $200 credit (10% of $2,000).
These thresholds are doubled for joint filers. Although the IRS adjusts the thresholds annually for inflation, movement in recent years has been minimal.
Note that other restrictions may apply. For instance, this credit can't be claimed by a child who is under age 18, a full-time student, or a dependent on your return. Finally, be aware that the credit is non-refundable, so it cannot reduce your tax bill below zero. If you have questions, we're here to help.
