1 Week to Go – Remind Your Employees of the IRA Deadline

The IRS has given us 2 extra days to file this year due to April 15th falling on a Sunday and the recognition of Emancipation Day on April 16th.  This also provides a few extra days to consider contributing to an IRA.  Your employees are probably aware that any changes they make to their 401(k) contributions can’t impact last year’s tax picture but do they know about the ability to make a prior year contribution to an IRA and how an IRA contribution can increase their overall tax refund with a Saver’s Credit?With  the Saver’s Credit, the IRS provides a credit that offers up to $1,000 for single filers and $2,000 if filing jointly as an incentive to save for retirement.  This credit is based on contributions made to either an employer-sponsored plan, Traditional IRA, and/or a Roth IRA and based on income grid found on the form 8880, the credit can be worth up to 50% of the first $2,000 of retirement contributions.

For lower income employees, making a 2011 contribution to a Traditional IRA could even provide a greater advantage to their 401(k) contributions if they are eligible for the Saver’s Credit.  Here’s an example:

Alice, a single employee with 1 child who files Head of Household with a gross income of $28,000 in 2011 and is deferring 6% to her 401(k):

Without an IRA                                                                         With a $825 Traditional IRA


Gross income of $28,000                                                         Gross income of $28,000

Adjusted gross income of $26,320                                           Adjusted gross income of $25,495

Saver’s Credit of $ 336  (.2 x $1,680)                                        Saver’s Credit of $1,000 (.5 x $2,000)

In the case study above, Alice would have already been eligible for a Saver’s Credit on her 401(k) deferral, but only at the .2 factor.  So what’s with the odd amount of putting $825 in a Traditional IRA?  Well, that is the amount needed for Alice to drop her AGI down to below the $25,500 threshold to increase the Saver’s Credit to a .5 factor, providing a 50% “match” from Uncle Sam on both her 401(k) contribution AND her IRA contribution.  By setting aside $825, she gets an additional credit of $664 – which means her real net cost for her IRA is only $161.

Spreading the word to your workforce about this often over-looked tax credit can provide that one last push needed to encourage them to save more for their retirement.  Encouragement is certainly needed since a recent EBRI study indicates that only 20.8% of workers age 21-64 own an IRA and only 5.4% actually made a tax deductible IRA contribution in 2009, the latest year analyzed by EBRI.

So find room in your weekly newsletter or take a few moments to draft an e-blast this week about the IRA deadline before the opportunity is gone for your employees.

More like this:

Ever Wonder How Your Auto & Home Insurance Is Priced? Get A C.L.U.E.

Ever Wonder How Your Auto & Home Insurance Is Priced? Get A C.L.U.E.

Did you know that any insurance claims you have filed in the past 7 years for collision or comprehensive damage ...
Read More
Workplace Financial Wellness Programs: Frequently Asked Questions

Workplace Financial Wellness Programs: Frequently Asked Questions

Liz Davidson, founder and CEO of Financial Finesse, answers some of the most common questions about workplace financial wellness programs, ...
Read More
Workplace Financial Wellness Programs: Best Practices Guide

Workplace Financial Wellness Programs: Best Practices Guide

Our best practices guide for workplace financial wellness programs defines what it means to be financially well, and what constitutes ...
Read More

Subscribe

Be the first to know when new resources are published.