Get a tax credit for retirement plan contributions

Has low income kept you from contributing to an IRA or to your company's 401(k) plan?  If so, Uncle Sam wants to help.  Beginning this year, you could receive up to a $1,000 tax credit for contributing to an IRA or retirement plan at work.  That's in addition to the normal tax benefit for contributions.

Who qualifies?  To qualify, your adjusted gross income must be below $50,000 if you file a joint return.  The income limit is $25,000 for singles and $37,500 for heads of household.

There are other limitations.  The credit is nonrefundable, meaning it cannot exceed the amount of taxes you owe.  You're not eligible for the credit if you're a full-time student, under age 18, or the dependent of another taxpayer.  Also, withdrawing retirement funds within a set period may reduce or eliminate the credit.

How much is the credit?  The credit is between 10% and 50% of your contribution, depending on your income.  Only the first $2,000 of a contribution qualifies for the credit, so the maximum credit can be between $200 and $1,000 per taxpayer.  The tax credit is a direct reduction of the taxes you owe.

Example.  Say you qualify for the maximum $1,000 tax credit.  In addition, the tax deduction for a $2,000 IRA contribution could save an additional $300 in taxes ($2,000 x 15% tax rate).  The total tax savings adds up to $1,300.  That means you're only out-of-pocket $700 for a $2,000 contribution.

If you're within the income limits and otherwise qualify, this could be a great opportunity to jump-start your retirement savings.