Now's the Time to Sock it Away
By Scott Culver
A new federal tax credit rewards moderate-income workers who contribute
to a retirement savings plan such as a tax-sheltered annuity (TSA) or
individual retirement account (IRA).
Depending on your adjusted gross income (AGI) and filing status, the
credit can be as much as 50% of what you contribute (with a $1,000 ceiling)
to any of the following plans: TSA, 401(k), SIMPLE IRA, simplified employee
pension (SEP), or traditional or Roth IRA.
The credit kicks in this year as part of the tax relief bill passed in
2001, but it will be available only through the 2006 tax year. The adjacent
table shows the credits eligibility limits for each tax-filing status.
The tax credit is nonrefundable you cannot receive a refund of
all or any portion of the credit if your income tax liability is less
than the credit amount. Also, the credit applies only to elective contributions
you make to your account. Any employer contributions, also known as nonelective
contributions, do not apply.
To understand the potential of the credit, imagine a married couple with
a combined income of $34,000 where each contributes $2,000 annually to
a TSA. The $4,000 in contributions lowers their AGI to $30,000, saving
$800 in taxes owed (assumes 15% federal tax rate, 5% Wisconsin tax rate),
and qualifies them for the 50% credit, which garners another $2,000 in
savings. So, the actual out-of-pocket cost to sock away $4,000 in a TSA
would be only $1,200 ($4,000 - $800 - $2,000 = $1,200) for this couple.
Special rules apply to this program if you are a student or receive withdrawals
from a qualified retirement plan or Roth IRA. For more information on
the new tax credit, call the WEA Trust TSA program at 800- 279-4030.
Posted March 11, 2002