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Earn less than $ 65,000? Up to $ 2,000 in free retirement money could be yours

Saving for retirement can be difficult when you’re not making a lot of money. Fortunately, there is a special provision in the tax code designed specifically to help low- and middle-income Americans build a bigger nest egg.

This is called the savings credit, and it could offer you up to $ 1,000 in tax credit as a single person or up to $ 2,000 as a married couple. Since tax credits reduce your tax bill on a dollar-for-dollar basis, it basically amounts to getting $ 1,000 to $ 2,000 in free money.

Here is how it works.

Image source: Getty Images.

How to earn up to $ 2,000 in free retirement money

The savings credit is a tax credit that takes money off your tax bill when you make pension contributions to qualifying accounts such as an IRA or a 401 (k) workplace. Specifically, you’ll get back between 10% and 50% of the first $ 2,000 in contributions you make – and that includes money taken directly from your paycheck and put into a work plan.

The table below shows what percentage of your contribution you can expect as a credit for the 2020 tax year, based on your Adjusted Gross Income (AGI) and reporting status. These figures are indexed to inflation, and the income thresholds will be a little higher in 2021.

You will receive a credit equal to

If you are single or married, you file separately and your AGI is:

If you declare as head of household and your AGI is:

If you are married, file jointly and your AGI is:

50% of your contribution

$ 0 to $ 19,500

$ 0 to $ 29,250

$ 0 to $ 39,000

20% of your contribution

$ 19,501 to $ 21,250

$ 29,251 to $ 31,875

$ 39,001 to $ 42,500

10% of your contribution

$ 21,251 to $ 32,500

$ 31,876 to $ 48,750

$ 42,501 to $ 65,000

Data source: IRS.

So what does this mean for you? Suppose you are a married spouse filer with adjusted gross income of $ 38,000. You and your spouse would be entitled to a credit equal to 50% of the first $ 4,000 of contributions ($ 2,000 for each of you). If you contribute a total of $ 4,000, you will get a tax credit of $ 2,000.

Of course, if your income were a little higher, your credit would be less. If you had an AGI of $ 50,000 and contributed $ 4,000 as a married couple, you would receive a credit valued at 10% of your contribution, or $ 400. While it’s not as generous, it’s still money available for pension contributions that can help you build a more secure future.

And tax credits are much more valuable than tax deductions. While a $ 2,000 deduction would only reduce your tax bill by up to $ 240 if you are in the 12% tax bracket, a tax credit offers dollar-for-dollar reduction. If you previously owed $ 5,000 in taxes and got $ 2,000 in credit, you owe only $ 3,000.

There are a few conditions for taking advantage of the savings loan, beyond the income limits. For example, you cannot be declared as a dependent on someone else’s tax return and you must be at least 18 years old. You also cannot be a full-time student.

But if you’re eligible, there’s no reason to pass up free money. So try to contribute at least $ 2,000 as a single person or $ 4,000 as a couple for Uncle Sam’s maximum help in growing your nest egg.