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Hacking My Taxes (Saver’s Credit)

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 ). 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.

Bottom line

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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Author: Leana

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.

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7 thoughts on “Hacking My Taxes (Saver’s Credit)

  1. While contributing regularly to an IRA is one strategy, there is a compelling case for making a lump, max-out contribution on the first day of business in January. When the money is invested that much longer, the dividends and potential for growth are higher. Financial analysts have run numbers showing this approach win out on nearly all 10-year span increments (not the 1929 market crash, or 2008 I believe).

    There is risk either way — do incremental investments and potentially miss out on much more money over time (tens of thousands of dollars simply by investing it all in January!!)

    or, the risk of putting it all in in January and having the market totally tank in February.

    Personally, I am favoring the max-it-out-in-January strategy.

    • @Kacie Thanks for your input! What you are saying makes a lot of sense. I have no doubt in the statistics you’ve quoted. One caveat: past performance doesn’t guarantee future results. We live in a crazy time when all bets are off, right?
      I probably should have added that making smaller regular contributions is easier to swallow than making a lump sum. My blog targets regular folks, and most simply won’t invest $2,000 on January 1st of each year. By automating the process, you remove the temptation to spend the money on something else. I’m a big fan of automating things when it comes to finances and life in general.

  2. Leanna, thanks for informative post. I was unaware of that savers credit.

    Also, thanks Kacie for the max out in January idea. I never heard of it, but it makes complete sense from a compounded interest point. True on the risks if the market tanks, but nice to learn something new.

    • @Lisa M Glad you found the post beneficial! And I agree, Kacie’s comment brought up a valid point, so I’ve updated the post to encourage folks to read it.

  3. I blogged about this a few months ago and linked to my sources, in case anyone would like to read (and I get it if you’d rather not link out!)

    It is factoring in compound interest, but also greater dividends.

    But yeah I hear you, Leana, many times the funds aren’t available to do a lump investment. The contribution comes from each paycheck, and that is fine.

    Paying attention to fees (Vanguard is great at this!), having a proper asset allocation, and sticking to your plan are really important. That, and maximizing your tax strategy.

    • @Kacie Not a problem at all! I went ahead and linked to your post. I’m sure readers will find it helpful. I think this is a very important topic that deserves to be covered. It’s not really my niche, so I do these types of posts sparingly.
      However, the truth of the matter is, many people will do better paying attention to saving money rather than chasing after miles and points. We only have so much energy in any given day. Sometimes by focusing all of our attention on travel rewards we can miss the forest for the trees. I’m sure that’s true in my case. I wonder how much I would make by now if I focused solely on accumulating cash. Of course, it’s possible to have your cake and eat it too! I try to balance out my travel obsession by paying attention to bank bonuses and other lucrative cash back opportunities.

  4. Pingback: Personal Finance Blogs vs. Miles and Points Hobby - Miles For Family

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