Tax Break Helps Low- and Moderate-Income Workers Save for Retirement

Plan Now to Get Full Benefit of Saver’s Credit; Tax Break Helps Low- and Moderate-Income Workers Save for Retirement

Low- and moderate-income workers can take steps now to save for retirement and earn a special tax credit in 2008 and the years ahead, according to the Internal Revenue Service.

The saver’s credit helps offset part of the first $2,000 workers voluntarily contribute to Individual Retirement Arrangements (IRAs) and to 401(k) plans and similar workplace retirement programs. Also known as the retirement savings contributions credit, the saver’s credit is available in addition to any other tax savings that apply.

Eligible workers still have time to make qualifying retirement contributions and get the saver’s credit on their 2008 tax return. People have until April 15, 2009, to set up a new IRA or add money to an existing IRA and still get credit for 2008. However, elective deferrals must be made by the end of the year to a 401(k) plan or similar workplace program, such as a 403(b) plan for employees of public schools and certain tax-exempt organizations, a governmental 457 plan for state or local government employees, and the Thrift Savings Plan for federal employees. Employees who are unable to set aside money for this year may want to schedule their 2009 contributions soon so their employer can begin withholding them in January.

The saver’s credit can be claimed by:
Married couples filing jointly with incomes up to $53,000 in 2008 or $55,500 in 2009;
Heads of Household with incomes up to $39,750 in 2008 or $41,625 in 2009; and
Married individuals filing separately and singles with incomes up to $26,500 in 2008 or $27,750 in 2009.

Like other tax credits, the saver’s credit can increase a taxpayer’s refund or reduce the tax owed. Though the maximum saver’s credit is $1,000 ($2,000 for married couples), the IRS cautioned that it is often much less and, due in part to the impact of other deductions and credits, may, in fact, be zero for some taxpayers.

A taxpayer’s credit amount is based on his or her filing status, adjusted gross income, tax liability and amount contributed to qualifying retirement programs. Form 8880 is used to claim the saver’s credit, and its instructions have details on figuring the credit correctly.
In tax-year 2006, the most recent year for which complete figures are available, saver’s credits totaling almost $900 million were claimed on nearly 5.2 million individual income tax returns. Saver’s credits claimed on these returns averaged $213 for joint filers, $149 for heads of household and $128 for single filers.

The saver’s credit supplements other tax benefits available to people who set money aside for retirement. For example, most workers may deduct their contributions to a traditional IRA. Though Roth IRA contributions are not deductible, qualifying withdrawals, usually after retirement, are tax-free. Normally, contributions to 401(k) and similar workplace plans are not taxed until withdrawn.

Other special rules that apply to the saver’s credit include the following:
Eligible taxpayers must be at least 18 years of age.
Anyone claimed as a dependent on someone else’s return cannot take the credit.
A student cannot take the credit. A person enrolled as a full-time student during any part of 5 calendar months during the year is considered a student.
Certain retirement plan distributions reduce the contribution amount used to figure the credit.

For 2008, this rule applies to distributions received after 2005 and before the due date (including extensions) of the 2008 return. Form 8880 and its instructions have details on making this computation.

Begun in 2002 as a temporary provision, the saver’s credit was made a permanent part of the tax code in legislation enacted in 2006. To help preserve the value of the credit, income limits are now adjusted annually to keep pace with inflation. More information about the credit is on IRS.gov.

Setting up a SEP for your Business

A SEP is a Simplified Employee Pension plan. Because this is a simplified plan, the administrative costs should be lower than for other, more complex plans. Under a SEP, employers make contributions to traditional Individual Retirement Arrangements (IRAs) set up for employees (including self –employed individuals), subject to certain limits.

To establish a SEP, you:
Can be a business of any size, even self-employed.
Must adopt a SEP plan document.
Generally cannot have any other retirement plan.

Here are some tools to help you start up your SEP.
How to set up a SEP Plan.
Forms and Publications you'll need to start and operate your SEP.
"Starting a SEP or SIMPLE IRA Plan" video - a discussion on two types of retirement plans (SEP and SIMPLE IRA) that are tailored for many businesses (2:00 min.)

Advantages:
Easy to set up and operate - usually just a phone call to a financial institution gets things started.
Administrative costs are low.
Plan can have flexible annual contribution obligations – a good plan if cash flow is an issue.
Under a SEP, you, the employer, make contributions to traditional IRAs (SEP-IRAs) set up for each of your eligible employees. A SEP is funded solely by employer contributions. Each employee is always 100% vested in (or, has ownership of) all money in his or her SEP-IRA.

How does a SEP work?
Jed works for the Quincy Chintz Company. Quincy decides to establish a SEP for its employees. Quincy has chosen a SEP because the chintz industry is cyclical in nature, with good times and down times. In good years, Quincy can make larger contributions for its employees and in down times it can reduce the amount. Quincy knows that under a SEP, the contribution rate (whether large or small) must be uniform for all employees. The financial institution that Quincy has picked to work with for its SEP has several investment funds for the Quincy employees to choose from. Jed decides to divide the contribution to his SEP-IRA among three of the available funds. Because only employer contributions are permitted, Jed cannot also make contributions under the SEP.

A SEP has a life cycle with four distinct stages. Click on the below links to review additional information on each of the life stages of a SEP.
Choosing a SEP
Establishing a SEP
Operating a SEP
Terminating a SEP

SEP ChecklistIt is important to review the requirements for operating your SEP every year. This checklist has been designed as a diagnostic tool to help you keep your SEP in compliance with important tax rules.
SEP Fix-It GuideTips on how to find, fix, and avoid common mistakes in SEP plans.