by Mark Butler

Created on: December 07, 2011   Last Updated: December 08, 2011

With the demise of employer funded pension plans throughout the United States with the exception of government provided pensions such as exist with the Federal Employee Retirement System, the military retirement system and most state government employment systems; Congress has sought to encourage individuals to provide for their own retirement.  This trend resulted in efforts to encourage lover income people to save for their retirement.

          One of the ways this was done was the implantation of the Retirement Savings Tax Credit that is claimed using IRS Form 8880.  This form is one of the easier IRS forms to complete despite it having several different categories of how it applies to various taxpayers and to a number of income levels.

          The basic premise of the Retirement Savings Tax Credit is that low income earners who place money in a retirement savings account such as an Individual Retirement Account (IRA) or a 401K plan (or similar plans such as the federal employees Thrift Savings Plan) will get a tax credit that reduces their tax liability by as much as 50 percent of their contribution to the retirement account.

          The amount of the credit varies depending on income level and filing status.  For those who file jointly with income up to $34,000 it is possible to claim a 50 percent tax credit on a contribution whereas a single filer can only earn up to $17,000 and still earn a tax credit.  As income goes up from there the amount of the tax credit goes down until it reaches 0 percent. 

          While there is no doubt that many politicians patted themselves on the back with passing of the legislation that made this possible it is necessary to look at what such earnings truly represent.  For example, a single person who is making less than $17,000 annually is pulling down less than $8.25 an hour.  How much of that can that person really save?  And for a family that makes less than $34,000 a year that means the combined income of both wage earners is less than $17 per hour.  For people in this category it may seem like a great idea to save money but generally speaking the people who make that level of income are more concerned about the present than an uncertain future. 

          Perhaps a better solution would be to enable these people to enhance their skill sets so that it is possible to earn more or at least get a job where the employer provides some level of matching contribution.  For now the Retirement Savings Tax Credit is the only game in town and while it may have made politicians feel good about themselves it really has done very little to help the retirement situation for the working poor.

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