Now's the Time to Sock it Away

By Scott Culver
Communications Specialist
WEA Trust

March 2002

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 credit’s 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