Recently, we were chatting with a client who is concerned that his under-employed college graduate child isn't able to contribute to a retirement plan. The client was always a great saver, understands the value of compound interest and wants the child to start saving now. Like a lot of twenty-somethings, the child is mostly self-supporting, but just doesn't have the additional funds to contribute to an IRA. Is there anything the parent can do?
Do you have children, grandchildren or other loved ones that you would like to help begin saving for retirement? Do you want to help them get into the habit of saving, help them understand the magic of compound interest and help them appreciate how tax planning can be advantageous?
If they are currently age 18 or older, not a full-time student, not claimed as a dependent and are "under-employed" (single with adjusted gross income of less than $30,500), we can help!
Below is an idea that is very low cost and will have a direct impact. It is called the Retirement Savings Contributions Credit ("Tax Saver's Credit").
The first step is to help them open an IRA. Contributions can be made up until April 15, 2016 for the 2015 tax year. If their income is less than $30,500 in 2015, they will qualify for a tax credit, which means they will pay less federal income tax. The maximum annual contribution eligible for the tax credit is $2,000, and the credit rate is 50% to 10% of the amount contributed.
For example, if your child is a single filer in 2015 and has annual gross income (AGI) less than $18,250, a $2,000 IRA contribution would qualify for a $1,000 tax credit. If the child's AGI is between $18,250 and $19,750, the tax credit is 20% of the IRA contribution and if AGI is between $19,750 and $30,500, the tax credit is 10% of the IRA contribution. The 2016 income limits are a little higher. A tax credit of $1,000, $400 or $200 is a meaningful benefit for anyone with AGI of less than $30,500.
If you want them to participate more actively, you can suggest they contribute some or all of the tax credit to the IRA. Assuming they qualify for the "Saver's Credit", the Roth IRA (tax-free savings) is probably most appropriate. However, a Traditional IRA (tax-deferred savings) might be appropriate if the IRA deduction helps them reduce their AGI to a point where they qualify for the tax credit.
The Saver's Credit is also available for employer-sponsored retirement plans, like 401(k), 403(b), SIMPLE and SEP plans. These plans might offer a matching contribution which can provide a significant boost to anyone's retirement savings.
The Tax Saver's Credit is a great opportunity to start a positive conversation about retirement savings with your child or grandchild who might not put saving for retirement at the top of their priority list. Your conversation can focus on the importance of tax-free or tax-deferred retirement saving, the magic of compound interest and the advantage of the Saver's Tax Credit which is a current and tangible benefit. Hopefully, this will instill in your child or grandchild a long-term habit of saving.
Please contact us if you have questions or would like to set up a consultation for your loved ones.
Lincoln Financial Advisors does not provide legal or tax advice.
Peter Raskin is a registered representative of Lincoln Financial Advisors Corp. Securities and advisory services offered through Lincoln Financial Advisors Corp., a broker/dealer and registered investment advisor. Insurance offered through Lincoln affiliates and other fine companies. Securities and advisory services offered through Lincoln Financial Advisors Corp., a broker/dealer and registered investment advisor. Insurance offered through Lincoln affiliates and other fine companies. CRN: 889697-032614