Consider free cash from feds
If you have a modest income, you've probably been asking yourself how you will ever be able to find the money to start saving.
So here it is: Provided your income is low enough, the federal government will pay you to stash money away for your retirement — giving you as much as $1,000.
The deal comes through what's known as the “saver's credit.” You can find it buried in the tax return you do each year, and if you use the free tax preparation software the government gives people with incomes below $58,000, locating the saver's credit will be fairly easy. The “Free File” software is available at IRS.gov.
I suggest using the software, because paper forms make finding and using the saver's credit more difficult than finding Waldo on a book page. Even finding the name in tax materials will be perplexing, because the government uses two other names for the saver's credit. On the 1040 form, look for “Retirement Savings Contribution Credit,” and, on Form 8880, look for “Credit for Qualified Retirement Savings Contributions,” said Catherine Collinson, president of Transamerica Center for Retirement Studies. You won't find the saver's credit on the 1040EZ form.
Hunting for this credit is worth the extra effort.
The saver's credit is available to individuals with incomes less than $29,500 and couples with incomes less than $59,000, and the benefit depends on your income. Go to http://1.usa.gov/1dkeGik. The typical credit is about $200 for couples and about $122 for individuals. To qualify, you have to save for retirement either through a 401(k) or similar retirement savings plan at work, or through a new or existing individual retirement account.
Although you might think saving is impossible given your bills, the found money may make it possible. Consider a nurse whom Texas certified public accountant and financial planner Jerry Love advised. With an income of almost $32,000, she would have thought the saver's credit was outside her reach. But Love had her put $2,500 into an IRA, where she will save for her retirement years from now on.
By reporting on her tax return that she was putting $2,500 into an IRA, she got a deduction that brought her income just below the $29,500 maximum allowed for the saver's credit. Immediately, that cut her taxes by $375. Then she got a saver's credit of $250.
In other words, the government gives her $625 to save for her future. So she can save a total of $2,500 for retirement but needs to come up with only $1,875 out of pocket.
When people don't have the full $2,500, or some lesser amount, available to deposit immediately in an IRA, they use tax filing deadlines to their advantage. They report on their taxes what they will deposit in an IRA, then file their taxes long before the April 15 deadline for IRA contributions. When the tax refund arrives, they use that money to fund their IRA fully — just as they reported on their tax return — by April 15.
You don't have to put $2,500 into an IRA. Even $50 would do at a brokerage firm such as Scottrade or Charles Schwab.
The nurse in Love's example put in $2,500 so she could get her income down to the level needed to get the saver's credit. If she retires in 40 years, the $1,875 she took out of her pocket, plus the money from the government, will end up giving her about $54,000 for retirement.
And if she stashed another $2,500 a year into the IRA for the next 40 years, she could end up with almost $700,000.
Gail MarksJarvis is a personal finance columnist for the Chicago Tribune. Readers may send her email at firstname.lastname@example.org.
Show commenting policy
TribLive commenting policy
You are solely responsible for your comments and by using TribLive.com you agree to our Terms of Service.
We moderate comments. Our goal is to provide substantive commentary for a general readership. By screening submissions, we provide a space where readers can share intelligent and informed commentary that enhances the quality of our news and information.
While most comments will be posted if they are on-topic and not abusive, moderating decisions are subjective. We will make them as carefully and consistently as we can. Because of the volume of reader comments, we cannot review individual moderation decisions with readers.
We value thoughtful comments representing a range of views that make their point quickly and politely. We make an effort to protect discussions from repeated comments either by the same reader or different readers.
We follow the same standards for taste as the daily newspaper. A few things we won't tolerate: personal attacks, obscenity, vulgarity, profanity (including expletives and letters followed by dashes), commercial promotion, impersonations, incoherence, proselytizing and SHOUTING. Don't include URLs to Web sites.
We do not edit comments. They are either approved or deleted. We reserve the right to edit a comment that is quoted or excerpted in an article. In this case, we may fix spelling and punctuation.
We welcome strong opinions and criticism of our work, but we don't want comments to become bogged down with discussions of our policies and we will moderate accordingly.
We appreciate it when readers and people quoted in articles or blog posts point out errors of fact or emphasis and will investigate all assertions. But these suggestions should be sent via e-mail. To avoid distracting other readers, we won't publish comments that suggest a correction. Instead, corrections will be made in a blog post or in an article.
- Bank of New York Mellon seeks to intervene in N.J. casino saga as power plant taps collateral
- Greece makes stocks slip to worst day of year
- Pending home sales in U.S. climb to 9-year high
- Supreme Court justices ream EPA for ignoring costs to meet air standards
- Heinz executives to dominate post-merger management of Kraft Heinz Co.
- Snappers treat revitalizes Lawrenceville’s Edward Marc Brands chocolatier
- University mine rescue teams join to set rules, competitions
- Drillers to submit electronic records on fracking chemicals to Pa. DEP
- Teen retailer American Eagle Outfitters goes mobile, revamps site
- Of oil pressure and 10-year-old tires
- 50M people might be affected if Anthem succeeds in buying rival health insurer Cigna