Make Sure You're Taking Advantage of the Additional Tax Credit on IRA and 401k Contributions if Eligible

Did you know that you may be eligible to receive an additional tax credit on contributions made to a traditional IRA or other pre-tax retirement account? Depending on your income, you may qualify for up to a 50% tax credit that is in addition to the before tax benefits already applied to the contribution. This is an often overlooked credit, and even though it is based on income, many people are still eligible.

It is important to note that this is a tax credit, not a deduction. Tax credits are harder to come by, and help you out even more than most deductions. A tax deduction shaves money off of your taxable income. For example, if you have a taxable income of $40,000 and receive a $1,000 deduction, your taxes are based on $39,000 of income. On the other hand, a tax credit lowers the amount of actual taxes you owe. So if you need to pay $1,000 in taxes, but receive a $500 credit, you now only owe $500. That is a big savings.

Who’s Eligible

To be eligible for this tax credit, just a few restrictions apply. First, you must be at least 18 years old before the end of the tax year. Second, you cannot be a dependent or full-time student. And finally, you need to fall within the income limits. The limits for the 2008 tax year are:

IRA Tax Credits 2008

The Income Limits Don’t Put This Completely Out of Reach

As you can see from the chart above, if you’re married and only one spouse works, it can be reasonable to fall within the credit limits. For example, a married couple with an AGI of $34,000 would be eligible for a 20% credit on contributions. That means if you make a $2,500 contribution into your IRA for the year, you’ll be eligible to receive a $500 tax credit. That is nothing to sneeze at, because it is essentially $500 in your pocket. Combine that with the taxes you saved by reducing your taxable income by $2,500 and it provides a strong incentive to save.

Don’t Ignore This Credit if You Think You Qualify

Even if you aren’t sure whether or not you’ll qualify, it is worth double checking come tax time. By the time you adjust your income, you might find out that you do qualify for some free money. Something is better than nothing. This credit is also a good incentive for lower income families to begin saving. Money is probably tight, but the benefits of the credit combined with reducing your income with contributions will only put more money into your pocket.

Author: Jeremy Vohwinkle

My name is Jeremy Vohwinkle, and I’ve spent a number of years working in the finance industry providing financial advice to regular investors and those participating in employer-sponsored retirement plans.

2 comments
The Jarhead
The Jarhead

Sweet can that deduction be taken if one spouse is a full time student and the other works?

flowers names
flowers names

I will consult with my accountant , I think I really qualify for this