It’s not very often that you can get hundreds of thousands of dollars in free money. But some Americans have a prime opportunity to do just that, simply by making a smart financial choice.
That choice: Claiming the Saver’s Credit. If you’re a married couple eligible for the full credit and you claim it every year for 30 years, you could end up with nearly a quarter of a million dollars in extra free cash in your retirement accounts courtesy of Uncle Sam.
Scoring free retirement money takes just one simple move
The Saver’s Credit is an incredibly valuable tax credit designed to help lower- and middle-income Americans save for their later years. It works like this: You invest in an eligible retirement account. You get a tax credit equaling either 10%, 20%, or 50% of the amount you contributed, up to a maximum eligible contribution of $2,000 for single filers or $4,000 for married joint filers.
If your income is low enough to qualify you for the 50% credit and you and your spouse invest the maximum combined amount of $4,000, you’d get a $2,000 dollar-for-dollar reduction of the amount you owe the IRS. That’s totally free money the government is giving you to cover half of the cost of your retirement investment. If you’re a single person, your maximum credit would be worth $1,000.
And the deal gets even sweeter when you consider the fact that you can invest that money. When you do, it goes to work for you and earns returns that in turn get reinvested. This process — called compounding — helps you build wealth very quickly, since each year your invested balance grows and potential returns also grow accordingly even without you doing anything.
Because of the power of compounding, the free $2,000 Uncle Sam is giving you every year can turn into a whopping $226,566 if you claim the full credit every year for 30 years and earn an average 8% annual return. And that’s just from the $2,000 that the IRS gave you — it doesn’t take into account the fact that you had to invest $4,000 to qualify for it. A $4,000 annual investment made for 30 years would actually turn into over $450,000.
Not everyone can claim the Saver’s Credit — but everyone can take advantage of compound interest
The Saver’s Credit is available only to a limited subset of Americans. In fact, to qualify for the 50% credit as a married joint filer, you’d need an adjusted gross income under $39,500 as of 2021. However, a married couple could earn up to $65,000 and still be eligible for a 10% saver’s credit.
But while not everyone can get $2,000 free from the government, most people qualify for some type of tax-advantaged retirement savings, whether that’s a 401(k), an IRA, or both. And anyone who invests can take advantage of the power of compounding to turn a $2,000 annual investment into more than a quarter of a million over three decades.
If you’re eligible for the Saver’s Credit, do everything in your power to claim it so you don’t leave this free money on the table. And if you don’t qualify, you should still invest as much as possible for retirement until you’re putting aside around 15% to 20% of your income. The sooner you start, the more compounding can grow your wealth into a big pot of cash to support you as a retiree.