Thursday, January 27, 2011

A Hidden Gem-The Savers Credit Could Be Worth $1,000 To You

Yahoo! Finance has a highlight out on an article "Save $1,000 on Your Tax Bill" by Consumerism Commentary, provided by US News and World Report on Wednesday, January 26, 2011:

I recommend this article as it does a great job of telling you about the value of this credit, which is designed to give low income taxpayers a powerful incentive to save.  (Low income meaning this credit is gone at an income of $27,750 for singles and $55,500 for married couples filing jointly, and begins to be phased out at lower income levels than those).

But this article points out that you should take a second, serious look at the savers credit.  I'd like to add an exclamation point to a couple of items they discuss.
 Last week I mentioned the powerful results that can come from consistent monthly savings of even $100.  How over a 40 year working career that $100 every month can become a million dollars.  With the Savers Credit, the government is offering to give you a credit of $10 to $50 per month towards that $100 -- so that you would only have to be saving a net of $50 to $90 per month, even better than the $100 level!

This credit is available on both traditional and Roth accounts.  You read this correctly!  You can set up a Roth, pass on the immediate tax deduction in order to get permanent tax free accumulation -- and still get this tax credit!  Or you can choose a traditional IRA or 401(k) account and get a federal and state tax deduction in addition to the credit, possibly lowering further the net cost to you of saving $100 every month.

With those tax benefits, those who procrastinate on saving every month thinking they can afford it better later in life should really take another look.  Especially since you don't have to follow my advice to save at least $100 every month.  If you start smaller, you still have the Savers Credit as well as the tax deductions available for whatever amount you do contribute to your retirement account.

One more thought ... most tax software will catch your participation in a 401(k), SEP, or similar qualified plan on your W-2 forms and automatically calculate the Savers Credit for you if you are at the applicable income levels.   But this is yet another reason to work with a tax pro, to get another set of eyes looking out for you to make sure this and other tax opportunities don't fall through the cracks and you get everything you are entitled to.  Two sets of eyes are better than one, even when you are using a computer to help you with your taxes.

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