Ep. 132 | Retirement Saver's Credit Explained
Download MP3Hey, everybody, and welcome back to the Teaching Tax Flow podcast, episode 132 today. We are diving into the retirement savings contributions credit. Better yet, it's known as a saver's credit. And And before we get into this one in detail and figure out if you qualify or somebody you know does, let's take a brief moment and thank our episode sponsor.
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John Tripolsky:Hey, everybody. Welcome back to the podcast today. We are gonna dive into, as you've seen in the the show title description there, we're gonna look at retirement savers credit. So I have no idea actually what this is, Chris. So I brought my pen.
John Tripolsky:I got my paper. Let's hear all about this here. I'm intrigued. I'm intrigued, sir.
Chris Picciurro:Well, you didn't welcome me back to my own podcast this time, but I'm gonna welcome myself back in. Thank you for the thank you so much for the warm introduction.
John Tripolsky:You know what it's like? It's almost like if I was standing in the front door of your own house inside, and you came to walk into it and grab the handle, And I opened it up, and I was in there. It's like, oh, well, welcome home, sir. Welcome home.
Chris Picciurro:Well, first of all, before we jump into this topic, you know, I truly appreciate we have seen a ton of growth in our YouTube channel, teaching tax flow YouTube channel, and our Defeating Taxes private Facebook group that's defeatingtaxes.com or www.feedingtexas.com. You know, this isn't the sexiest topic we talk about here on tax planning and strategy, but our the feedback from everyone has been so kind, so encouraging, and actually, our topic ideas come from you, the listeners, the viewers. So thank you so much. We truly appreciate it. We do not take you for granted.
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Chris Picciurro:Good job. We appreciate you. Okay. I'm off my soapbox, John. I'm coming in a little churse.
John Tripolsky:Hey. It's all good, man. It's all good. You're right. I mean, just the the audience and the communities that we have at these events on these online communities, it's great hearing what people what people are interested in.
John Tripolsky:And obviously, we have the the downloads to to prove it, that people love this stuff.
Chris Picciurro:For sure. So let's talk about the retirement savers contribution credit. It's a federal tax credit out there available to all taxpayers. If you meet the qualifications, we're gonna talk about the qualifications. You might find this online as called the, quote, unquote, savers credit.
Chris Picciurro:And before we jump into the details, I want you to remember one of the three laws of teaching tax flow that tax agencies are your involuntary business partner. Tax laws are written to what? Encourage or discourage behavior. That could be financial. That could be social.
Chris Picciurro:This happens to be a financial, action that they're encouraging. And we know that not enough people in The United States are putting money away into retirement, specifically people in lower to moderate income households. So what the IRS is doing is they're saying, you know what? You might you might have an employer that matches your retirement plan contributions, or you might not. But guess what?
Chris Picciurro:We're gonna be a double bonus employer. If you meet the qualifications, we're gonna match your retirement savings contributions for you in the form of a credit. That's free money. Credits are not taxable. So this is a really great opportunity for people to take advantage of this credit.
Chris Picciurro:Many listeners might already be receiving this credit and might not know it because sometimes people just look at the bottom line of of their tax, and do they receive a refund, or do they have a balance due? By the way, if you have a balance due, that doesn't necessarily mean you did anything quote unquote wrong. It just means you didn't pay in enough during the year to cover the tax that's due. If you wanna change that, if you wanna control your tax, you do that by tax planning. Remember, the IRS picks your federal tax, and allows you take control, and you do tax planning and strategy, then you get to pick your tax.
John Tripolsky:And, you know, Chris, you you mentioned it's a credit. Right? And I think an easy way to kinda get that across your drive at home. Right? It's basically like extra credit, you know, back in back in school days.
John Tripolsky:Like, you have to do something to get that credit. They just don't hand it to you for the heck of it. Right? Like, you have to, I should say, contribute to get the match. Right?
John Tripolsky:They're you're just not gonna get it. They're not gonna dump money into a retirement account for you. That's not a that's not what we're talking about here.
Chris Picciurro:Right. Right. Exactly. That is that is true. You're right.
Chris Picciurro:So the credit you get, it's like extra credit. You get credit for for for doing that. Well, let's jump into the savers credit. Okay? Couple things we have to remember.
Chris Picciurro:A credit and a deduction are two different things. I know we have a ton of content in teaching tax one on the YouTube channel about that, but a credit is typically better than a deduction. A credit is a dollar figure that benefits you. A deduction is a an amount that you reduce your taxable income by. And then your credits come in two different shapes and sizes.
Chris Picciurro:Right? You've got refundable. You've got nonrefundable. Refundable credits are better typically than nonrefundable credits, meaning a refund ugh. Easy for me to say.
Chris Picciurro:A refundable credit a refundable credit means that even if you don't have tax, you get that refunded to you. The vast majority of their credits are nonrefundable, which means you get the credit, and it offsets federal tax if you have federal tax to pay. And now that that could ultimately give you a larger refund. The savers credit is a refund or is a nonrefundable tax credit. So it's a federal nonrefundable tax credit.
Chris Picciurro:And again, it's really there to encourage low to moderate income individuals to save for retirement. Now let's start with some good news, John. The credit applies to many different qualifying retirement accounts, not just tax deferred accounts. Right? So it's traditional IRAs, Roth IRAs.
Chris Picciurro:So think about this, John. You could potentially put money into a Roth. You're in a lower to moderate income household. You don't necessarily need that tax deduction today. So you're putting money into that Roth.
Chris Picciurro:It's gonna grow tax free, which is amazing, and get distributed tax free, and you're gonna get a retirement saver's credit. That's like the double dip. Right? You're getting paid to put money away tax free.
John Tripolsky:Right. Wow. That's about the equivalent to as good as it gets with the IRS keeping their grubby hands off your dollars.
Chris Picciurro:Mhmm. Yeah.
John Tripolsky:I'd like against the IRS completely, but I
Chris Picciurro:know you're not a big sweets guy, John, but, you know, I have a sweet tooth. You can have this big scoop of ice cream, and it you know, it's gonna taste great. You're gonna eat it. And when it gets in your body, it's gonna burn 2,000 calories for you without doing any exercise. So think about that.
Chris Picciurro:So what retirement accounts are eligible for their savers credit? Traditional IRAs, Roth IRAs, four zero one k's, four zero three b's, four fifty seven b plans, which is for typically for, like, a school district or nonprofit, and even able accounts are are open are are available for those credits. So bottom line is pretty much every almost every type of I mean, SAPs, I think I mentioned. Almost almost every type of retirement account is eligible for you to get the credit, meaning if you make a contribution. So step one, you have to make a contribution to a retirement account.
Chris Picciurro:Pretty much any type of retirement account is eligible. And bingo bango, as a famous Detroit Red Wings commentator used to say when I think you know who I'm talking about. Didn't that was it Mickey Redman who say
John Tripolsky:I think so. I was just jogging my memory. I'm like, I believe it was Redman.
Chris Picciurro:Don't know why I remember just listening hearing that. Anyway, you you're eligible for the credit even if it's a Roth. Okay. So this sounds great. So far, we're doing good.
Chris Picciurro:What's the credit looking like? Well, the credit is up to a thousand dollars for an individual and up to $2,000 for a married filing joint. Now, again, that might not sound like big numbers, but look at at the per for the people that are gonna be eligible for that credit, that could be a significant amount of their disposable income. The bottom line is it's found money. Right?
Chris Picciurro:You're getting paid to put money in your retirement account. Not too shabby, John. Not too shabby. Now here's where it gets a little trickier. Right?
Chris Picciurro:Because the credit is limited based on income. Alright? And that driver is gonna be one of two things, your adjusted gross income and your filing status. Adjusted gross income, you know that well, you know, we like acronyms. John, you're supposed to make and maybe you will by once you edit this podcast.
Chris Picciurro:You're supposed to make a sound effect whenever we use an acronym here in the teaching tax flow podcast.
John Tripolsky:It's gonna be like a toilet flushing or something completely unrelated
Chris Picciurro:to That's fine. As long as we have one, and I'm gonna be listening. When this podcast goes live, I really hope there is a sound effect, but I'm gonna use an acronym called AGI, adjusted gross income. It's a very common acronym in the tax planning and strategy and preparation community. So your AGI and your filing status determine your eligibility for this credit on top of, did you put money away?
Chris Picciurro:Right? So if you put money into a qualifying plan, that's step one. And the next step's gonna be, do you get to you know, are you bay do you are you eligible based on income? So let's listen up. For 2025, we're using 2025 numbers.
Chris Picciurro:They're adjusted for inflation typically. So if your 2024 returns on extension, the numbers might be just a touch different. But for married filing joint couples, the credit begins to phase out at $46,000 of adjusted gross income, and it's completely phased out at 76,500. So let me take a step back. When we're talk this gets really confusing for taxpayers because their credits also, we know that they're you could be refundable or nonrefundable, but some credits have what we call a cliff.
Chris Picciurro:Some credits have a phase out. Right? A cliff means you get the full credit until you go $1 over the limit, and then you fall off the cliff and you get nothing. Hopefully, that doesn't happen, you know, physically. Other credits phase out gradually.
Chris Picciurro:So you could be eligible for the full credit, but if your income goes up, it's a sliding scale that you get a little bit less of a credit. So in general, married filing joint couple, $152,500 of adjusted gross income or less are gonna be eligible for at least a partial credit. Under $46,000 is eligible for the full credit, which could be up to $2,000. So think about that taxpayer. Let's say they have $45,000 of adjusted gross income.
Chris Picciurro:Now when you look at the numbers, the average household income in The United States, it's you know, we talk it's it's somewhat in line with the top part of these phase out. Tax this is what I keep saying is tax planning is for everybody at every income level. It's not just for people with a lot of assets and a lot of income. And I would argue, and you've you've heard you've been around me enough, John, where I I keep beating this drum, that it's actually, in many ways, more important for lower to moderate income families because that extra $2,000 is a huge, huge deal for them. You know?
Chris Picciurro:So married filing joint, let's say you're at $45,000 of adjusted gross income, and you've put money into a retirement account, even a Roth. Right? I would encourage someone to put money into the Roth at this point. Well, in that case, you could still get that credit because you don't need the deduction at that income level. So those are the phase outs 2025.
Chris Picciurro:'40 '6 thousand of AGI, 76,005 for married filing joint. Let's talk about head of household. So head of household is a filing status when you have a qualifying dependent and you are unmarried. The phase out's a little different. Alright?
Chris Picciurro:That phase out starts occurring at 34,500. So if you have 34,500 of AGI or less, full credit eligible. It starts to phase out, and it completely phase out phases out at about $57,400. That's for 2025. And then single filers are married filing separately.
Chris Picciurro:It's interesting, though, because 99 of the time, it's better for married couples to file jointly. This might be one of those unique situations where it makes sense to file separately. There's a couple unique situations, but those phase outs are a little less. So for a single taxpayer or married filing separate, it the the phase out begins at $23,000 of adjusted gross income and completely phase out phases out at about $38,000 of adjusted gross income. So again
John Tripolsky:And I and I know we kinda ran through a lot there as far as for the numbers, you know, how how and what. Really, really kind of a dumb question, but not really. Say somebody's preparing their own taxes at this point or or they're working with somebody who just happens to do them for them. Maybe it's a family member or something that, you know, they just kinda we won't call it. They push papers, but it's a pretty simple return.
John Tripolsky:So in in in this case, if they if they qualify for this, I mean, is is this something that's just a line item on a return, or or what did it what do they have to do to get this credit if they qualify for it?
Chris Picciurro:Right. If they qualify for it, yep. They just file they just file a separate form. I wanna say it's a form eighty eight eighty. Gosh.
Chris Picciurro:I hate to
John Tripolsky:I hate because I know you haven't seen the you probably haven't seen too many of these at all. So this is like asking me what I had for breakfast in, you know, 02/2002.
Chris Picciurro:No. That's alright. No. It is oh my gosh. Just is an $88.80.
Chris Picciurro:So you file a form eighty eight eighty. Put that in the show notes, please. And also, I get my name on the board, and then with a plus, I get extra recess time because I did my homework.
John Tripolsky:I'll put you a star on the board, sir. Yeah. Here you go. You get a star on the board.
Chris Picciurro:A form eighty eight eighty. You file that with your personal tax return. So that's something that you just file as part of your return. Now if you're working with a tax professional or yeah. They're gonna pick 99 of the time, they're gonna pick this up.
Chris Picciurro:Right? If you're not working with a tax professional, then you've gotta make sure that you're you're putting the numbers on the right spots if you're doing a self prepared return. You know, when when you're looking at w two, that's why I mean, when you look at that w two, it's funny. I just talked to my business partner on our private CPA, you know, our private CPA firm that you know well, and and we we're talking. He was actually working on his sister's tax return who changed states midway through the year, and I'm like, man and she's a teacher.
Chris Picciurro:I'm like, dude, that's why I'm telling you, there is no such thing as an easy tax return. Nothing is easy. If you mess up let's say you have someone with a w two wage of $35,000 and they put money into their traditional IRA, that's nowhere on the w two, and you didn't realize that you screwed up a tax return. Or if you have a w two with a bunch of numbers in it with employer match and pretax HSA and this, that, and other thing, it's so easy to screw up. Right?
Chris Picciurro:So
John Tripolsky:And I know we've been at, you know, we've been at, again, events, conversations, podcasts. We've done it on, on the Mr. R show, which is a podcast specifically for tax pros. You know, the the topic of AI has come up, you know, more often than not within the last year, a ton. And I kinda see this.
John Tripolsky:You know, you mentioned the the the simple, seemingly simple return, right, is very difficult in some sense. Because, yeah, it it doesn't know exactly what you have going on in your head if you haven't projected that into anywhere, like, oh, I'm gonna move in six months. Well, a system doesn't know that unless you put it out there somehow. Now, yeah, sure. I can do a look back and and do an analysis of some things, and that's helpful.
John Tripolsky:Right? But there's never gonna be the easy automatic button. There's an easier button, I'd say, but there's no easy button or a done button.
Chris Picciurro:Exact and and you know what? The other thing is, if you're in one of the lower to middle income households, I would encourage you to look up VITA, Voluntary Income Tax Assistance. And in fact, we we've been trying we've been efforting to get someone from that organization on our as a as a guest. There's some complimentary resources out there that are maybe their CPAs, enrolled agents, tax professionals that are retired. They still wanna help out.
Chris Picciurro:They still wanna give back, and they're very qualified to help you with this type of credit. So don't think that you've got, you know, that that don't be in there's there's someone to help everybody. Let's put it that way. So
John Tripolsky:Absolutely. In every situation.
Chris Picciurro:I'm sorry?
John Tripolsky:In every situation.
Chris Picciurro:Literally. Situation. Absolutely. Let's get back to this credit. Right?
Chris Picciurro:So the actual percentage of contributions that qualify for the credit based on those phase outs is either gonna be 10% at the low end, 20%, or up to 50% depending on where your income falls. So let's run through a quick example. Let's say you're single. You're looking to mingle. You've got $20,000 of adjusted gross income, and good job.
Chris Picciurro:You put 2,000 in your Roth IRA. Right? If a $20,000 worth of income, you don't want to you don't need to put money into a traditional IRA. You put 2,000 into a Roth. You know, you could receive up to a 50,000, 50 percent credit because you're under the threshold for single filers.
Chris Picciurro:That's a hun or that's a $1,000 reduction of your tax bill. That's that's real money in your pocket. Right? Now let's keep in mind, as I'm gonna reiterate and I've already discussed, these credits are nonrefundable. So it could reduce your tax liability to zero, but you're not gonna get a refund beyond that.
Chris Picciurro:So and these have to be new contributions. Rollover contributions do not count. Now the final eligibility. There are there is ultimately, you you typically can't be dependent on someone else's return, but there's gonna be three basic eligibility requirements. One, you must be at least 18 years old.
Chris Picciurro:Two, you can't be a full time student during the tax year. And three, you can't be claimed as a dependent on someone else's return. So this credit works great for someone that's just getting into the workforce. They're no longer a student, and and they're just getting rolling. As you mentioned, and put me on the spot a little, I don't mind, form 8,880 is where you're gonna claim that credit, And and, also, you get double dip.
Chris Picciurro:Right? Because this credit is in addition to the deduction you're getting if you are going pretax with with the contribution. So think about this. If you put money into a four zero one k, right, you're getting a deduction for that because it's coming off your income, and you're still getting the credit. So you get to double dip.
Chris Picciurro:You get that ice cream, but it burns calories once it gets in your body if you're eligible for this retirement savers credit.
John Tripolsky:And I can think of a lot of situations like that too. You mentioned, you know, that that criteria there at the end. I think that is pretty important. You worded it perfect. Right?
John Tripolsky:Like, they're not looking, and rightfully so, to offer this to somebody who's a dependent, who's in school, because that is just it's a it's a lot piling in and whatnot. But, I mean, I see this as being, like you said, somebody that just got out of school. And I and, you know, I'm I'm thinking of, you know, our market specifically where I live. I mean, there's a lot of guys that have gone to trade school, have gotten out, you know, by the time they're 20 years old. They're probably not filing as a depend I mean, I'm just making an assumption.
John Tripolsky:Probably not filing as a dependent. They are in a position kind of as a it's it's an internship ish, but it it's a they're employed. So right there, when they get out of this, they'll be making a hundred, hundred and 50, 2 hundred thousand dollars a year, say, you know, in the utility world or anything like that. But at this specific time, right, they might only be making $40.45, 50. Like, what a perfect position to be in because they're gonna get phased out soon when they move on.
John Tripolsky:So take advantage of that little window little window that they're in.
Chris Picciurro:Or yeah. And think about somebody that let's say they've had a you know, let's look if someone maybe, you know, that worked at at a large large corporation for many years. And oh, actually, I've got one. I mean, let's let's look at someone that might be a firefighter. Right?
Chris Picciurro:They started maybe with the at age 20. At their age 50, which is my age, they're already gonna be ret they're retiring from the and they still have Jews, or they want a second career. Maybe they don't maybe it behooves them to not draw their pension right away. They have some savings. So for the next couple years, they might not make a ton of money.
Chris Picciurro:Maybe they're working part time as a substitute teacher, and they wanna spend more time with their kids. They might be eligible for this credit. The point is for this credit, it's all income based year to year. There's no asset level test. So you could have $10,000,000 and get this credit if you meet the income criteria.
John Tripolsky:That is a excellent point. Like, yeah, a lot of guys retire women retire, and then they go, you know, like, I I I if it was up to me, I'd go be a greeter at Lowe's or something like that. You know? And not Walmart. I'm not a Walmart fan.
John Tripolsky:It's a whole another discussion. But, anyways, they
Chris Picciurro:We know your feelings on Walmart. Unless you say and Walmart, if you want a sponsor, we could turn you it around.
John Tripolsky:Apps and Buc ee's. You know, if somebody wants to go
Chris Picciurro:Oh, no.
John Tripolsky:Although there
Chris Picciurro:yesterday, I don't wanna talk about it.
John Tripolsky:I have to say it because you bring up pickleball all the time. I I believe it was a post that was put out by them. They pay a crap ton
Chris Picciurro:They do.
John Tripolsky:For managers. And you But you also have to deal with chaos. You know? You know what Detroit is?
Chris Picciurro:They're usually in areas that are pretty low cost of living because they're the middle between two big, big cities. Like, we stopped in, I think, Athens, Alabama coming home from baseball tournament at at the rodent's nest, I call. And, yeah, I know I know beavers aren't rodents, but that's just what I call them. But just real quick example since our wives never listen to this, by the way. This is why I don't like Buc ee's.
Chris Picciurro:Okay? I'm gonna just put it out there. In in this, you know, we might lose you might you might hit some unsubscribes. Right? We're walking around like idiots.
Chris Picciurro:No. I'm not. I I I'd refuse to get any food there because I know it's overpriced, and they give you too much. And my wife and daughter, like, put throw things in the basket. Well, that's our lunch for tomorrow.
Chris Picciurro:Okay? I didn't get anything. What happens on the drive home? I ended up with a full I had chicken fingers and some leftover because everyone else gets overserved. And I'm like, why do I wanna order a meal when I know I'm gonna get leftover?
Chris Picciurro:You know, I'm happy with what they order. But here's the bugaboo, John. So if I would've ordered a meal for myself, I would've just wasted money. Oh, and my I might I might have to you're gonna have to remind me when this comes out because I'm gonna make sure that that she listens to this. Guess what's sitting in my refrigerator right now?
John Tripolsky:Oh, some leftovers.
Chris Picciurro:No. The lunch they had to have Oh. For today that they bought yesterday. So I can't wait till they get home. I know or I can't wait to open that refrigerator up and show them the lunch overpriced lunch that they had to have.
John Tripolsky:Although, on the flip side, then we will wrap this up, and and we promise. When me and you go into Buc ee's, we treat it like a speedway. We get we fuel up. We go in, grab maybe something, use the restroom, and we're out. It's like a six minute excursion.
John Tripolsky:We're a
Chris Picciurro:machine, baby. We are a machine.
John Tripolsky:You got it. You got it.
Chris Picciurro:You need to be a machine when you do tax planning. Hey. I'm happy to do these episodes for our lower to middle, moderate income households in all seriousness. It's not all about high income, high asset level taxpayers. So hopefully, they they had an opportunity to listen to this, and and maybe do a little planning, and make sure they take advantage of the savers credit.
John Tripolsky:Yeah. Absolutely. And and as Chris mentioned a little bit earlier on this too, if if you didn't catch that, I'll say it again. Check out our private Facebook group that's defeatingtaxes.com. We'll put that in the show notes here as well too.
John Tripolsky:Direct link. Over 2,100 people, I believe, in there, a lot of them actually are tax pros. And here's a good little tip for anybody. If you do have a question that you say you don't feel comfortable or don't have somebody to ask, you can post it in there publicly, or you can post it anonymously. Surprisingly, even a lot of the anonymous posts that get in there get a lot of traction.
John Tripolsky:They get a lot of good answers. So don't feel that you have to put all your business out there. Everybody's gonna know it. They're gonna click on your profile. They're gonna see where you live, your family pictures, all this stuff.
John Tripolsky:Post it anonymously if you have to. Literally, that community is built to help people that are part of it. So as we continue this journey of teaching tax flow, we'll see if we'll be back here again next week on the podcast. Different time, same day of the week, completely different topic. See you buddy very soon.
John Tripolsky:Have a great week.
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