Are you or someone in your family – for example, a child who recently graduated from college – starting a new career? It's not too early to start saving for retirement. In fact, it is generally recommended that you start retirement planning as soon as you are anchored in your first job.
Fortunately, the tax law offers help in the form of “retirement savings”. Subject to certain restrictions, you can claim this credit on the 2020 tax return that you will file in 2021.
The retirement savings account is available for the first $ 2,000 in voluntary contributions to qualifying retirement or IRA. (If they wish, taxpayers can continue to contribute up to the allowed annual limits.) This includes:
- Contributions to a traditional or Roth IRA;
- Deferred elective pay contributions to a 401 (k), 403 (b), state 457 (b), SARSEP, or SIMPLE plan;
- After-tax employee voluntary contributions to a qualifying retirement plan (including the federal savings plan) or 403 (b);
- Contributions to a 501 (c) (18) (D) plan; and
- Contributions to an ABLE account for which you are the designated beneficiary (as of 2018).
The size of the loan is 50%, 20% or 10% depending on your Adjusted Gross Income (AGI). These numbers are indexed annually for inflation. The following tables show the AGI thresholds for 2021 and 2020.
Source: https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-savings-contributions-savers-credit
This tax credit has often flown under the radar in the past. For example, it may be overlooked or not known by school leavers. However, any taxpayer can qualify for credit if they meet these three requirements.
- The taxpayer applying for the credit is at least 18 years old.
- Anyone claimed to be dependent on someone else's return will not be eligible for credit.
- A full-time student (i.e. someone who is enrolled in school for part of five calendar months of the year) is not eligible for the credit.
Assuming that you or another family member qualifies, the deadline for drawing retirement credits for IRA contributions is the tax return due date for the year of contribution. Therefore, you have until April 15, 2021 to set up a new IRA for 2020 tax year or contribute to an existing one.