In general, people do not put enough money aside for retirement. Furthermore, with life expectancies increasing, the nest egg required to fund a retirement has also continued to grow. Medical costs are increasing twice the rate of inflation and Social Security will not be enough for a comfortable retirement. What should a person do? At least fully fund Individual Retirement Accounts such as (IRAs), 401(k) or 403(b) plans, and if self-employed a SIMPLE IRA or Simplified Employee Pension (SEP). Often, money put into these plans are tax deferred or deductible and, at times Uncle Sam even pays for some of it by an income tax credit.
For example, the Pension Protection Act of 2006 extended the IRC Secton 25b saver’s credit permanently. The non-refundable credit is calculated as a percentage of the qualified contributions made to a retirement account. The credit ceiling for any individual is $1,000. The percentage is based on AGI and filing status, and the credit phases out as income increases. Contributions qualifying for the credit include those made to traditional IRAs, or Roth IRAs, plus elective deferrals to I.R.C. § 401(k) plans, I.R.C. § 403(b) annuities, I.R.C. § 457 governmental plans, SIMPLE IRAs, SARSEPs, and voluntary after-tax contributions to a qualified plan such as the federal Thrift Saving Plan.
Form 8880, Credit for Qualified Retirement Savings Contributions, is used to calculate the amount of the credit, which can be used to offset both income tax and alternative minimum tax. The income limits for each credit percentage increased for 2007 returns.
Saver’s Credit
Credit Rate MFJ Income Head of Household Single/ MFS Income
50% Up to $31,000 Up to $23,250 Up to $15,500
20% $31,001–$34,000 $23,251–$25,500 $15,501–$17,000
10% $34,001–$52,000 $25,501–$39,000 $17,001–$26,000
As an example, if a person that is married and files jointly with an adjusted gross income of $32,000, 20% of a $4000 IRA contribution would be eligible for a $800 tax credit. Even if a Saver’s Tax Credit is not available because of higher adjusted gross income levels, the tax deferred aspect of retirement plan savings is still a valuable consideration.
How much can a person contribute to the various plans: See these charts:
RETIREMENT PLAN CONTRIBUTION LIMITS
Year IRAs SIMPLE 401(k), 403(b) & SEP
2001 $2,000 $6,500 $10,500
2002 $3,000 $7,000 $11,000
2003 $3,000 $8,000 $12,000
2004 $3,000 $9,000 $13,000
2005 $4,000 $10,000 $14,000
2006 $4,000 $10,000 $15,000
2007 $4,000 $10,500 $15,500
2008 $5,000
AGE 50 CATCH-UP CONTRIBUTION LIMIT*
Tax Year IRAs SIMPLE Plans All OtherPlans
2002 $ 500 $ 500 $1,000
2003 500 1,000 2,000
2004 500 1,500 3,000
2005 500 2,000 4,000
2006 1,000 2,500 5,000
2007 1,000 2,500 5,000
2008 1,000 TBA TBA
*The limit is adjusted annually for inflation in $500 increments
Some farm families are experiencing high incomes and should consider this as an opportunity to save for retirement. In the long run, it may pay a lot better than buying depreciable assets as a strategy to save tax dollars.