Savers' Credit: Poor People Need an IRA, Too

Q: Tax Playa, I'm a lowly Hill staffer just getting by.  Are there any additional tax advantages for contributing money to a Roth IRA besides the usual advantages IRAs give?
Shawn, Washington DC

A: I hear you, Shawn.  Despite popular misconceptions, entry-level jobs on the Hill (especially the House side) often pay in the low $20k area.  The good news is that Uncle Sam has a special tax credit for retirement savers who don't earn a lot of money.

If you make contributions to a qualified retirement plan (like a 401(k), 403(b), SIMPLE 401(k), SIMPLE IRA, SEP-IRA or 457 plan), or to an IRA (either a Traditional IRA or a Roth IRA), you may be eligible for a retirement savings contribution credit, usually referred to as the "Saver's Credit."

The credit is not available to taxpayers who were full-time students for any five months of the year.  Also, the credit is not refundable, meaning that any unused amount is simply lost if tax is completely zeroed-out.

The credit is based on combined savings in such accounts with an annual limit of $2000 ($4000 if MFJ).  The credit is calculated by multiplying the amount saved by a credit percentage.  The percentages decline with AGI, and are completely-disallowed for taxpayers in 2007 making more than $25,000 ($50,000 if married filing jointly).  Below is the credit percentage allowed based on AGI:

	MFJ	HH	S, MFS, QW
$0-$15500	50%	50%	50%
$15501-$17000	50%	50%	20%
$17001-$23250	50%	50%	10%
$23251-$25500	50%	20%	10%
$25501-$26000	50%	10%	10%
$26001-$31000	50%	10%	N/A
$31001-$34000	20%	10%	N/A
$34001-$39000	10%	10%	N/A
$39001-$52000	10%	N/A	N/A
$52000-	N/A	N/A	N/A

The Pension Protection Act of 2005 indexes the above table for inflation.  This is important, because astute observers will note that the lower-earning end of the table can result in a credit larger than tax owed for filers claiming the standard deduction.  Some have called for this credit to be refundable as a result.  That would be a misplaced policy objective since the earned income tax credit and additional child tax credit are already refundable.

Nonetheless, if you are a worker who falls into these brackets and would like to see your taxes go down for retirement savings, this is for you.

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