There’s free money available to people who invest in retirement accounts, but the money is often overlooked.

Everyone has the opportunity to invest in a retirement account, whether it is an employer-sponsored 401k or traditional IRA. Many workers are aware that they can invest in these plans with tax-free dollars (or pay no taxes on gain later, in the case of a Roth IRA).

However, many low-income workers take a pass on the benefits of retirement investing because of the financial strain that they perceive the saving will have on their tight budgets. What is not common knowledge is that there is a tax credit available to help fund retirement accounts for those with limited financial resources.

IRS rules allow for low-income wage-earners to lower their tax liability to reward retirement savings. The Saver’s Credit provides a maximum $1,000 credit for those who contribute to a retirement savings account and file single. For those married filing jointly, the credit can go as high as $2,000. Although there are qualifications and restrictions, for many who qualify it’s a free source of retirement funding that shouldn’t be dismissed without careful consideration.
 

How to Qualify for the Saver’s Credit

Like any tax credit, you need to be able to jump through the qualification hoops to take advantage of the benefits. Obviously, you’ll need to file taxes and save some money in an IRA or employer-sponsored retirement account, like a 401k. There are additional rules and restrictions.

The credit is for mid-to-low income earners and the amount of the credit is determined by your income. The income limits for 2011 are $56,500 for married filing jointly, $42,375 for head of household and $28,250 for other filers. Your income also determines the percent of your retirement investment that will be credited to your tax bill (See full schedule of percentages and income limitations) and the maximum amount of the credit cannot exceed $1,000 for single filers and $2,000 for joint filers.

For example, a single filer earning $17,000 and investing $2,000 in a Roth IRA would receive a credit for 50% of their contributions ($1,000).
 

A Credit Means the Government Pays You Back 50% of Your Retirement Investment

It is important to note that the benefit that the government is offering is not a deduction, but a credit. On the scale of great tax breaks, tax credits are the most beneficial for taxpayers. That’s because while deductions merely lower how much income you report for taxes, a tax credit is a dollar-for-dollar reduction of the actual tax bill that you pay. So, if you owed $1,000 in taxes, paid $1,000 out of your paycheck all year and your credit is $1,000, you will be getting $1,000 back from the IRS for a tax refund.

Another way to take advantage of the credit (besides a hefty refund check) is to use the credit in a way that the government pays up to 50% of your retirement contribution. If you struggle to come up with the money to open a qualifying retirement account, the Saver’s Credit gives you the opportunity to increase your exemptions on your W2 and lower the taxes you pay out of your paycheck. It’s like getting a pay raise, because you can reduce the amount that comes out of your paycheck for taxes by the amount of the credit you’d receive. Just make sure that the “pay raise” is going into your retirement account and not your bank account or you’ll get a hefty tax bill instead of free money.
 

It’s Not Too Late for 2011

Interested yet? If you are, it’s not too late to take advantage of the credit. The IRS gives taxpayers up until April 15, 2012 to make contributions to IRA accounts and recognize those investments on their 2011 taxes.

What could be cooler than saving money for saving money?

Good luck Penny Hoarders!