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In 2002, Congress passed legislation to create an income tax credit designed to encourage lower- and middle-income people to save money for retirement. The saver’s credit, worth up to $1,000 a year for individuals ($2,000 for couples filing jointly), rewards people for contributing to an IRA or 401(k) plan.
Regrettably, the people most likely to benefit from the saver’s credit are also those who can usually least afford to set aside money for retirement. It doesn’t help that only one-quarter of people earning less than $50,000 even know the credit exists.
But if you can squeeze a few dollars out of your budget, the saver’s credit is worth pursuing. Tax credits reduce the amount of income tax paid, dollar for dollar, so many low-income people can recoup the amount they contribute to retirement accounts by up to 50 percent through reduced taxes. And those whose employers match a portion of their 401(k) contributions reap even bigger rewards.
Another good selling point: Parents or grandparents who want to jumpstart their low-income kids’ retirement savings can fund their IRA or 401(k) contribution, thereby making them eligible for the saver’s credit even if they can’t afford to contribute on their own.
Here’s the nitty-gritty on the saver’s credit:
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