Save For Retirement, Get a Tax Credit: IRS Form 8880
When you are not rich, it takes gargantuan effort to save aggressively for retirement. One thing that can sway your decision on whether it’s worth it to put money in to something like an Individual Retirement Account (IRA) is the Saver’s Credit. The IRS has developed not one but two ways to encourage taxpayers to save for the golden years. The very well known IRA tax deduction is popular and widely used to reduce income tax owed. The Saver’s Credit, claimed on IRS Form 8880, is a lesser-known way to save on taxes by contributing to your own retirement fund.
The Saver’s Credit and Your Retirement
You can contribute up to $5500 a year to your own personal retirement fund and get great tax advantages. An IRA is really a mutual fund, usually, with special rules so you can get tax favored treatment on those funds. $5500 a year is a lot to some, and not very much to others. For anyone making $40,000 or less, it’s quite a bit. For anyone who qualifies for the Saver’s Credit, the maximum IRA contribution limit is huge. Why? Read on.
The Saver’s Credit is not For the Rich
Nope, if you are well off then forget about filling out IRS form 8880. Your Adjusted Gross Income (AGI) must be less than $29,500. That means your annual income minus deductions and other exemptions and adjustments must be quite low on the grand scheme of things.
Therefore, if you qualify for the Saver’s Credit and you contribute the maximum IRA limit, you are a very aggressive saver. That’s because you are contributing approximately 20% of your income to your retirement fund. Way to go!
How to qualify for the Saver’s Credit
In addition to the Adjusted Gross Income limit, there is another requirement. You cannot be very young and you cannot be a student. If you are younger than 17 then you are too young for Form 8880. If you are a student then also no Saver’s credit for you. And of course if someone else claims you as a dependent on their tax return, which is very likely when you are very young or a student, you also do not qualify to claim the Saver’s Credit.
You are classified as a student by the IRS if you were in school for at least 5 months. That’s being in school as a full time student. The school can be vocational school, trade school, anything like that.