We've almost made it through the first month of the year. If you haven't yet started funding a retirement savings account, now is a great time to get started. Here are a few tax incentives that make it easier to save for retirement.
Take advantage of the saver's credit. It's no easy task to contribute to a retirement account when you are in a low income bracket. But if you can do it, the returns are huge. If in 2010 you earned below $27,750 as a single filer or below $55,500 as part of a married couple filing jointly, then you qualify to take advantage of the retirement savings contribution credit. This credit, often referred to as the saver's credit, is given to taxpayers who contribute to retirement savings accounts including a 401(k), Roth IRA, or traditional IRA. The maximum credit you can earn is $1,000, by contributing $2,000 of your own money to a retirement account. If you contribute less, then the credit is lowered. You have until April 18th, or when you file your taxes, to make the contribution.
Fund a traditional IRA. If you aren't already contributing to a 401(k), then you likely qualify to make a tax deductible contribution to a traditional IRA. Depending on your income, you can contribute up to $5,000 and that money is deducted from your taxable income. A $2,000 contribution would roughly save you $500 in taxes if you are in the 25 percent tax bracket. Like the saver's credit, you have until April 18th to fund a traditional IRA for the 2010 tax year.
Save the 2 percent payroll tax cut. Tax legislation passed in late 2010 temporarily reduced the amount of Social Security tax that is withheld from your paycheck. Normally you contribute 6.2 percent of your income to the Social Security trust fund, but for 2011 the tax was cut to 4.2 percent. Take advantage of this payroll tax break by creating an automatic savings contribution of 2 percent to a retirement account.
Leverage your federal tax refund. If you do end up with a refund on your taxes this year, seize the moment to start taking care of your financial future. The average American tax refund is approximately $3,000. That would be an excellent amount to contribute to a retirement account. If your employer has a retirement plan matching program, then your $3,000 contribution could mean even more.
Philip Taylor is the author of 104 Ways to Save Extra Money. Read his popular blog, PT Money: Personal Finance for more insightful money tips, like his recent suggestions for the best online checking accounts.