The deadline for filing taxes is upon us. Every year I try to mention this quick tip for a middle-class family: don’t overlook Saver’s Credit. Hang on, I’m not going to bombard you with complicated numbers, I promise!
Here is how I was able to take advantage of it this year. As most of my readers know, I’m not shy about revealing what we make each year. I feel blessed that we fall into a middle-class category and that we have enough for food and even travel. So, this year, our adjusted gross income was drum roll, please… $63,300 (yes, this number includes the profit from the blog).
Our health insurance premiums are not part of that amount because they are not taxable. My husband contributes to 401(K) up to his company’s match, which is also pre-tax.
I have contributed $2,000 to a traditional Vanguard IRA in my name for 2016, something I highly recommend you consider doing as well. Setting up an automatic transfer each month is the way to go because you spread your risk that way. You are not buying when the market is inflated (see post from my reader Kacie for a contrarian take on this topic http://sensetosave.com/2017/01/19/a-case-for-maxing-out-iras-in-the-beginning-of-the-year/ ). I’m not going to make a recommendation on where you should invest because I’m not a financial advisor. I personally try to stick to mutual funds.
Unfortunately, the cut-off to receive a 10% credit on retirement contributions is $61,500:
You get it on up to $2,000 ( which equals $200) for each spouse. So here is what I did. I went ahead and added an additional $2,000 to my traditional IRA at Vanguard. It reduced our AGI to $61,300, which meant we would now qualify for 10% credit. As a result, we will receive an additional refund of $700. The $400 will come from Saver’s Credit and $300 is the amount I’ve saved by putting $2,000 into a traditional IRA rather than Roth.
Here is part of page 1040, to help you visualize how AGI is calculated:
Of course, it does mean leaving that $2,000 in the traditional IRA or risk paying 10% penalty upon withdrawal. But here is why it’s a no-brainer if you have the money. Let’s say I go ahead and withdraw $2,000. Yes, I’ll pay 15% tax plus penalty, which will wipe out my Saver’s Credit, plus savings on our 2016 tax return.
But here is the thing. My husband will get to keep his $200 Saver’s Credit. At this point he has already contributed to 401(K), and there is no going back. That’s why it made sense for me to just go ahead and make that additional contribution.
Of course, I don’t recommend you plan on withdrawing from your IRA unless there is a good reason to do so. And no, travel doesn’t count. For one thing, it will disqualify you from receiving Saver’s Credit for two years if you do. The idea is to take advantage of tax breaks that are available to you right now. Who knows, maybe in the future you’ll end up making a lot more each year and will no longer qualify for these incentives. Wouldn’t that be nice?
But my point is, grab it while you can. If you can afford it, that is. Worst case scenario: you’ll have an emergency and end up withdrawing the money from your traditional IRA. But it’s OK because you’ll be breaking even, and in some cases, the 10% penalty is waived.
It’s not too late even if you’ve already filed
Simply file an amended return. It’s not that difficult, and even if you have to pay someone, it shouldn’t cost more than $60 max. That’s what my sister-in-law (who is an accountant) charges her clients for a simple 1040X form. You can open an IRA at any bank or credit union today if you don’t feel like signing up for a Vanguard account. If you don’t want to take a risk by investing in stocks, you can always stick to FDIC-insured accounts such as CD’s.
If your AGI falls within the qualified range, you can open a Roth IRA instead. The advantage: you can withdraw the original contributions without penalty at any time, for any reason. The downside: contributions to Roth IRA are not tax-deductible.
Life is about balance. I’m the first one to admit that we don’t save enough for retirement. I prefer to focus on the “now.” Travel with my family now, that’s what excites me! Saving for travel during retirement when I’m old and decrepit? Yawn.
However, I believe in taking advantage of opportunities presented to me. This is one of those opportunities. Sure, I hate the idea of locking away $2,000. But hey, I got $700 as a reward, money I can spend on travel now! Can’t beat that.
P.S. You can read more details on Saver’s Credit and how it works in this blog.
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Leana is the owner and founder of Miles For Family. She enjoys beach vacations and visiting her family in Europe. Originally from Belarus, Leana resides in central Florida with her husband and two children.