Retirement Savings Contribution Credit

One way investors can receive a tax credit with their investments is by using retirement savings contribution credits. Tax credit can be applied to earnings by being a contributor to retirement plans that are sponsored by employees. IRAs also fit this category, and many investors use tools like retirement savings contribution credits to avoid paying higher taxes. When investors plan for their retirement, they must allocate a certain amount of income to cover taxes. Individuals must meet a certain amount of contributions to qualified IRAs and other venues to take advantage of the tax credit. Investors with a moderate income are highly advised to take part in retirement savings contribution credit strategies.

Individuals with low income are also encouraged to take advantage of these types of tax credits as well. People with low to moderate income find it more difficult to save for retirement than people in a higher income level. Luckily, retirement savings contribution credits can help those reach their goal of retirement easier. Investors can see up to 50% of their contribution written off with this tax credit. For example, an employee who contributes $10,000 to their company’s 401k over a certain period of time, and the company matches that with $5,000, the total investment in the 401k account will be $15,000. However, qualified individuals will receive a tax credit of $5,000, which means the contributor invested only a total of $5,000.

In other words, it cost the employee $5,000 for a $15,000 investment. This fact alone makes the retirement savings contribution credit extremely attractive for those planning their retirement. However, this isn’t made available for everyone. In order to qualify for these tax credits, you must be over the age of 18, must not be a full time student, and you must also not be an exemption on someone else’s taxes. Everyone else that works for a company that provides a 401k plan and IRAs can take advantage of these appealing tax credits.

There are a few other limits that must be considered when planning for a retirement and using these tax credits. For example, there are stipulations with the amount of tax credits you will receive that is dictated by the amount of income that is being earned. Those who are married and filing jointly will receive a 50% tax credit with an income at $32,000. An income at $34,500 will see a tax credit of 20% while an income at $53,000 or higher will only see a 10% tax credit.

These figures are also different if filing “head of household” and “other” which covers single, married filing separate, divorced or widowed. Contributions can be made to traditional and Roth IRAs, 401k plans, government plans such as the 457 plan, simple IRAs and the 501 plan. Depending on which accounts to use will be up to the individual that is planning for their retirement. The Pension Protection Act of 2006 has made these types of investments permanent. Filing for these types of tax credits are made easy online.

The form to file is called the 8880 form, which comes with complete instructions on how to file for a retirement savings contribution credit. For more information about the retirement savings contribution credit and on how to receive additional tax credits for your retirement, read chapter 4 of the IRS Publication 590. There it will explain everything there is to know about how these tax credits work. After doing the research, individuals that are ready to choose what type of retirement plan to go with should talk to their company for other available options that may benefit the employee.

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