Retirement planning: It pays to earn tax credits

The IRS offers credits to save more for your retirement.

Photo credit: Pixabay

Photo credit: Pixabay

The average American can expect to spend roughly 20 to 30 years in retirement. However, several unsettling facts about retirement savings were revealed in the 2016 Retirement Confidence Survey. In 2014, 30 percent of private industry workers with access to a defined contribution plan (such as a 401(k) plan) did not participate. Of workers with some retirement savings, 54 percent had less than $25,000 and 26 percent had less than $1,000.

Furthermore, the survey found that less than half of Americans have calculated how much they need to save for retirement. These reports show a considerable gap between workers’ expectations and retirees’ experience about leaving the workforce. Retiring earlier than planned may be due to unexpected downsizing, health issues, or caregiving choices. Preparing for retirement can become a great habit. To promote this, the IRS has incentives such as tax credits.   

With a 401(k), 403(b) and most government plans, the limits for 2017 stayed the same as the previous two years: $18,000, plus a $6,000 catch-up contribution for those 50 and older. If you’re lucky enough to have a generous employer matching your 401(k)-type plan or are self-employed, the maximum that can be contributed annually rose to $54,000 a year from $53,000.

For a traditional IRA, you can deduct contributions if they were not covered by a retirement plan with your employer up to $5,500 and $1,000 for catch up amounts.

The IRS has income limits for those who contribute to both a traditional IRA and a workplace retirement plan (or those whose spouses have access to a workplace plan), as well as the income limits for those who contribute to Roth IRAs.

If you contributed up to $2,000 in your retirement plan or IRA in 2016 or will in 2017, middle and low income earners could qualify for a Saver’s Credit. For 2017, plan ahead for this by including regular amounts automatically deposited into your retirement accounts, depending on your Adjusted Gross Income (AGI).

2017 Savers Credit

Credit Rate

Married Filing Jointly

Head of Household

Single Filer

50 percent

AGI<$37,000

AGI<$27,750

AGI<$18, 500

20 percent

$37, 001-$40,000

$27,751-$30,000

$18,501-$20,000

10 percent

$40,001-$62,000

$30,001-$46,500

$20,000-$31,000

Take the time to understand your retirement plan tax credits for filing your 2016 income tax return and consider your future goals. Tax time is also a good time to do a financial check-up, including your retirement planning. You can take our Financial Health Survey and get your score to learn about ways to improve your financial health. Be sure to check out Michigan State University Extension and MIMoneyHealth.org for great tips on many financial topics plus programs in the Events column.

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