Wouldn’t it be nice to have over a quarter of million dollars in extra retirement savings? You can, and here’s the best part: the federal government is just giving it away!
It’s not very often that you can get hundreds of thousands of dollars in free money. But some Americans have a prime opportunity to do just that and earn extra money for retirement simply by making a smart financial choice. That choice is claiming a little known tax credit.
It’s known as the “Saver’s Credit.”
If you’re a married couple eligible for the full credit and you claim it every year for 30 years, you could end up with nearly a quarter of a million dollars in extra free cash in your retirement accounts courtesy of Uncle Sam.
The Saver’s Credit is an incredibly valuable tax credit to help lower- and middle-income Americans save for their later years. It works like this: You invest in an eligible retirement account. You get a tax credit equaling either 10%, 20%, or 50% of the amount you contributed. The maximum eligible contribution of $2,000 for single filers or $4,000 for married joint filers.
If your income is low enough to qualify you for the 50% credit and you and your spouse invest the maximum combined amount of $4,000, you’d get a $2,000 dollar-for-dollar reduction of the amount you owe the IRS. That’s totally free money the government is giving you to cover half of the cost of your retirement investment. If you’re a single person, your maximum credit would be worth $1,000.
The best part?
The deal gets even sweeter when you consider the fact that you can invest that money. When you do, it goes to work for you and earns returns that, in turn, get reinvested. This process — called compounding — helps you build wealth very quickly. Each year your invested balance grows, and potential returns also grow accordingly even without you doing anything.
Because of the power of compounding, the free $2,000 Uncle Sam is giving you every year can turn into a whopping $226,566 if you claim the full credit every year for 30 years and earn an average 8% annual return. And that’s just from the $2,000 that the IRS gave you — it doesn’t take into account the fact that you had to invest $4,000 to qualify for it. A $4,000 annual investment made for 30 years would actually turn into over nearly half a million!
The Saver’s Credit is available only to a limited subset of Americans. In fact, to qualify for the 50% credit as a married joint filer, you’d need an adjusted gross income under $39,500 as of 2021. However, a married couple could earn up to $65,000 and still be eligible for a 10% saver’s credit. Even that can add up. So, if you are eligible, open up a qualifying retirement account and start claiming this credit as early as possible.
Do you have any other tips for how to save extra money for retirement? Share them below!