TSP

Potential $2,000 "savers credit". Image: H_Ko/Shutterstock.com

Did you know that low to moderate income workers might be eligible for a special tax credit if they save for retirement in an Individual Retirement Arrangement (IRA) and/or certain employer sponsored retirement savings plans such as the Thrift Savings Plan (TSP)?

The Retirement Savings Contributions Credit (Saver’s Credit) can help offset part of the first $2,000 that workers contribute to these plans.  To be eligible for the credit, workers must:

· Be at least 18 years of age;

· Not be claimed as a dependent on anyone else’s tax return;

· Not be enrolled as a full-time student during any part of 5 or more calendar months during the year.

· Have 2023 income below:
– $36,500 if their filing status is single or married filing separately;
– $54,750 if their filing status is head of household;
– $73,000 if their filing status is married filing jointly.

Based on the adjusted gross income (AGI) reported on your IRS Form 1040, you would be entitled to a credit of either 50%, 20%, or 10% of contributions you make to an IRA or employer sponsored retirement plan.  The maximum contribution that may qualify for the credit is $2,000 ($4,000 if filing jointly), which means that the maximum credit (i.e., at the 50% level) would be $1,000 ($2,000 if filing jointly).  Rollover contributions do not qualify for the credit.  The following shows the credit rates for 2023.

Credit Rate 50%
Married filing jointly $43,500 or below
Head of household $32,625 or below
Single/Married filing separate $21,750 or below

Credit Rate 20%
Married filing jointly $43,501 – $47,500
Head of household $32,626 – $35,625
Single/Married filing separate $21,751 – $23,750

Credit Rate 10%
Married filing jointly $73,001 and higher
Head of household $35,626 – $54,750
Single/Married filing separate $23,751 – $36,500

Credit Rate 0%
Married filing jointly $47,500 – $73,000
Head of household $54,751 and higher
Single/Married filing separate $36,501 and higher

Here’s an example taken from the Internal Revenue Service’s website.  Jill, works in a retail store, is married, and earned $41,000 in 2022.  Her spouse was unemployed and had no earnings.  After deducting her IRA contribution of $2,000, the AGI shown on the joint return is $39,000.  Based on the table above, Jill may claim a 50% credit ($1,000) for her $2,000 IRA contribution on her 2022 tax return.

Of course, IRS has a form (complete with worksheet and instructions) for the Saver’s Credit – Form 8880.

SECURE 2.0, just enacted into law enhances the Saver’s Credit by allowing government matching contributions to be paid directly into retirement accounts, but this provision will not take effect until 2027.

Did you know that a survey of TSP participation conducted by the Gallup organization showed that 87% of TSP participants were satisfied or extremely satisfied with the Thrift Savings Plan?  But wait – the survey results were reported in March (before the recordkeeping snafu) and the response rate was only 14%!

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