I was always fascinated with magic tricks. I could never figure out how the trick was performed, even when the magician revealed the secret. However, there is a financial trick that everyone can learn, and there are no secrets or magic involved. I will show you how an employee can have $1,029 deposited into their 403(b) account for only a $261 net after tax contribution, using the Savers Credit.
The Savers Credit is a dollar for dollar tax credit, provided to tax payers who are in a lower income tax bracket and who make contributions to an employer-sponsored retirement plan. Employees will need to claim the credit on their tax forms.
For example, a hypothetical nursing home pays a nurse’s aide $11 per hour, which in many areas is the prevailing rate for this profession.
Let’s assume the employer is providing a matching contribution of 50 percent of the first 3 percent the employee saves in the 403(b) Plan:
|Employee 3 percent Contribution||$686*|
|Employer 50 percent Match||+$343|
|Total 403(b) Contribution||$1,029|
- the employee is a single parent and is filing as head of household
- the employee has an effective tax rate of 12 percent of taxable compensation
- the employee is eligible for the IRS Savers Credit:
Here’s the magic:
|Employee 403 (b) Contribution||$686|
|Employee Contribution Tax Savings||-$82|
|Employee Tax Savers Credit||$343|
|After Tax Savings Net Contribution||$261|
Most employers and employees are not aware that the government provides a magic tax Savers Credit for lower income employees. But it’s a magic trick your employees will enjoy.
If you would like more information on the Savers Credit, please contact Jim Ceplecha at 800.807.0100 x2630.
Jim Ceplecha is the Managing Director of Retirement Planning Services at Christian Brothers Services.
* $22,880 employee yearly income x .03 = $686
** Please note this example is not meant as tax advice. An employee should always consult their tax advisor.