Saving for retirement during a recession is not simple, but the Federal Savings Credit makes it a bit easier for lower income families.

With our economy officially in recession, many people are understandably concerned with their immediate financial future. If you are lucky enough to have a retirement plan, then you know these times are difficult. Many people have lost half their retirement nest egg, and even worse, stopped contributing to these accounts.

However, these are arguably the fortunate ones, for millions of low-income workers have neither retirement savings nor access to an employer sponsored plan. According to Life Insurance and Market Research Association (LIMRA) International, about 44 million U.S. employees fail to contribute to their retirement because of bills, the cost of medical insurance and lack of employer-sponsored retirement accounts. 

According to the Urban Institute, the most valuable financial asset is a retirement account.  The percentage of all families with a retirement account stood at 50% in 2004.  However, for families earning in the bottom 1/5 percentile, only one in ten households had retirement savings.

In today’s uncertain economy, putting something aside for the future is more important than ever.

According to the Institute on Assets and Social Policy and Demos, 78 percent of seniors are not financially secure. This economic insecurity is particularly pronounced for single senior households, with 84 percent among them facing financial uncertainty. These statistics are especially troublesome as today's seniors are better prepared for retirement than subsequent generations will be.  Our children will be faced with a decline in employer-sponsored retirement savings and rising debt experienced by their younger households.

Major sources of economic risk include the lack of sufficient financial assets, housing, and health costs. More than half of seniors’ households do not have sufficient financial resources to meet median projected expenses based on their current financial net worth, projected Social Security, and pension incomes. Further, high housing costs put forty-five percent of all seniors' budgets at risk.  Paying out-of-pocket health expenses, including costs for additional insurance coverage, is burdensome for four out of ten senior households, and these costs will only rise over time.

One initiative to assist lower income families to save for retirement is the Federal Saver’s Tax Credit.  Created during President Clinton's administration and recently re-authorized by President Obama, this program provides a tax credit to further incentivize savings for low-income families.

The Saver’s Credit is a non-refundable tax credit available to eligible taxpayers who make contributions to a qualifying retirement plan. By contributing to a retirement plan and claiming the Saver’s credit, the taxpayer reduces the amount of income tax he/she owes to the IRS.

To be considered eligible for the Saver’s Tax Credit, employees:

• must be 18 or older;
• cannot be a full-time student;
• cannot be claimed as a dependent on another person’s return;
• must have contributed to a qualified retirement plan or an IRA this tax year; and
• must not have income higher than $53,000 for a couple filing a joint tax return ($26,500 for a single tax filer) in 2008.

Remember, this is a tax credit, not just a deduction. A tax credit lowers your tax bill dollar for dollar. A deduction reduces your taxable income, so, a deduction’s value depends on your tax bracket. If you're in the 25% bracket, a $1,000 deduction lowers your tax bill by $250. But a $1,000 credit lowers the bill by the full $1,000, regardless of your marginal bracket.
 
According to the IRS, in 2005, Saver’s Credits totaling more than $900 million were claimed on 5.3 million individual income tax returns. However, estimates suggest that roughly 23 million tax filers could have benefited from the Saver’s Credit. Research has shown that many fail to claim the credit simply because they don’t know it exists; in fact, approximately 1.4 million eligible filers actually made a qualifying contribution to their retirement account, but failed to claim the credit. Of greater importance, however, is that the majority of filers with an eligible income didn’t make a contribution to a retirement plan, a requirement to receive the credit.

The key is to start early, continue to contribute, and over time increase your monthly savings. For young people, starting a retirement plan the moment you begin working is one of the best financial strategies available. Saving just $85 a month, at 8% interest for forty years yields a retirement nest egg of $325,000.

It is not too late!
2008 retirement contributions can be made until April 15th, 2009. The Saver’s Tax Credit is a great opportunity to save for retirement and save on year-end taxes, all at the same time.