With each new year comes new opportunities to boost your savings. For many people, their first opportunity comes at tax time. As you prepare your tax return, here are two important ways to save that you should consider.
Find Out if You Qualify for the Saver’s Tax Credit.
The Saver’s Tax Credit is available to eligible individuals who save for retirement through voluntarily contributions to IRAs and 401(k) plans (or similar workplace retirement programs.) Many people who would qualify for this credit, however, know little about it. It is effectively a federal match for retirement contributions.
You can claim the credit for the 2014 tax year if you are:
* Single, married filing separately, or a qualifying widow AND your adjusted gross income is not more than $30,000;
* Filing as head of household AND your adjusted gross income is not more than $45,000; or
* Married filing jointly AND your adjusted gross income is not more than $60,000.
It is also important to note that the Saver’s Tax Credit is a non-refundable credit. In other words, if you do not owe taxes, then you will not be eligible for this credit. Download WISER’s fact sheet to learn more. The amount of this credit will not change the amount of refundable credits such as the earned income tax credit or the child tax credit.
Save Your Tax Refund!
If you expect money back from Uncle Sam this year, resist the urge to think of it as windfall or bonus that you can use to splurge on something you may not need. Instead, think of it as an instant stash of cash that you can use to boost your savings. IRAs and Savings Bonds are great places to park those tax refunds.
Individual Retirement Accounts (IRAs)
IRAs are a great option for retirement saving at tax time (or any time of year), especially if you do not have access to an employer-sponsored retirement plan. You can open an IRA at many financial institutions, including banks, mutual fund companies and brokerage firms. Both Roth and Traditional IRA accounts provide a convenient way to save money long-term. You can ask for free information on IRAs from your financial institution of choice to help you choose which IRA best fits your situation.
Here are some basics about IRAs to get you started (and check out WISER’s fact sheets on Roth IRAs and Traditional IRAs for more information):
* You can contribute up to $5,500, or $6,500 if you are 50 years or older.
* Traditional IRA accounts are tax-deferred, so you pay nothing while contributing but must pay taxes when you withdraw money at retirement.
* For Roth IRA accounts, you pay taxes now on your contribution, but you do not have to pay taxes when you withdrawal funds in retirement. This type of IRA is especially good if you expect to be in a higher income tax bracket upon retirement.
* IRAs are meant to be long-term investments. You will be penalized if you withdraw from your IRA before you reach 59 ½ years of age. A few exemptions to this rule include withdrawals for college tuition, certain medical expenses, and first time home purchases.
Did you know that you can direct a portion or all of your tax refund toward the purchase of savings bonds? Simply complete IRS form 8888 and submit it with your tax return. The most common and popular savings bond is the I Bond. I Bonds are savings bonds with interest rates tied to inflation, and they can be purchased for as little as $25 or $50. This is a great low-risk investment for folks with small amounts to invest, and/or who are getting closer to retirement age.
Here are the ins and outs of I Bonds, which are a great way to save any time of year:
* Current composite interest rate of I Bonds is 1.48% thru April 30, 2015.
* Your I Bond can earn interest for 30 years, after which you should cash it out
* You can cash your I Bond any time after 12 months, but if you do so before you have had it for 5 years, you will lose out on at least 3 months of interest.
* Interest you earn on any U.S. savings bond is exempt from state and local income taxes. You do not pay federal income tax until you redeem the bonds, or after 30 years.
In addition to using form 8888 to purchase savings bonds with your tax refund, you can buy savings bonds electronically any time of year by setting up an account at treasurydirector.gov. With a TreasuryDirect account you can directly purchase I bonds, or you can arrange for a payroll direct deposit or automatic deduction from another account to purchase I bonds at whatever denomination you select.
Whether you have $25 or $2,500 to spare, there are smart ways to invest your money and build your retirement savings. Saving at tax time can get you off to a great start for 2015, and you’ll benefit from these savings for years to come!