Mr. Donald J. Breece, Farm Management Specialist, OSU Extension at Lima (top of page)
In general, people do not put enough money aside for retirement. Furthermore, with life expectancies increasing, the nest egg required to fund a retirement has also continued to grow. Medical costs are increasing twice the rate of inflation, and Social Security will not be enough for a comfortable retirement. What should a person do? At least, fully fund Individual Retirement Accounts (IRA), such as 401(k) or 403(b) plans, and if self-employed a SIMPLE IRA or Simplified Employee Pension (SEP). Often, money put into these plans are tax deferred or deductible, and at times, Uncle Sam even pays for some of it by an income tax credit.
For example, the Pension Protection Act of 2006 permanently extended the IRC Section 25b saver's credit. The non-refundable credit is calculated as a percentage of the qualified contributions made to a retirement account. The credit ceiling for any individual is $1,000. The percentage is based on annual gross income and filing status, and the credit phases out as income increases. Contributions qualifying for the credit include those made to traditional IRA, or Roth IRA, plus elective deferrals to I.R.C. 401(k) plans, I.R.C. 403(b) annuities, I.R.C. 457 governmental plans, SIMPLE IRA, SARSEP, and voluntary after-tax contributions to a qualified plan, such as the federal Thrift Saving Plan.
Form 8880, Credit for Qualified Retirement Savings Contributions, is used to calculate the amount of the credit, which can be used to offset both income tax and alternative minimum tax. The income limits for each credit percentage increased for 2007 returns.
As an example, if a person that is married and files jointly with an adjusted gross income of $32,000, 20% of a $4000 IRA contribution would be eligible for a $800 tax credit. Even if a Saver's Tax Credit is not available because of higher adjusted gross income levels, the tax deferred aspect of retirement plan savings is still a valuable consideration (Table 1). For how much a person can contribute to various plans, see Tables 2 and 3.
Table 1. Savers Credit.1
|
Credit Rate |
MFJ Income |
Head of Household |
Single/MFS Income |
|
50% |
Up to $31,000 |
Up to $23,250 |
Up to 15,500 |
|
20% |
$31,000 to 34,000 |
$23,251 to 25,500 |
$15,501 to 17,000 |
|
10% |
$34,001 to 52,000 |
$25,501 to 39,000 |
$17,001 to 26,000 |
1MFJ = Married filing jointly and MFS = married filing separate.
Table 2. Retirement plan contribution limits.1
|
Year |
IRA |
Simple |
401(k), 403(b) & SEP |
|
2006 |
$4,000 |
$10,000 |
$15,000 |
|
2007 |
$4,000 |
$10,500 |
$15,500 |
|
2008 |
$5,000 |
TBA |
TBA |
1IRA = Individual retirement account, SEP = simplified employee pension, and TBA = to be announced.
Table 3. Age 50 catch-up contribution limit.1,2
|
Tax Year |
IRA |
Simple Plans |
All Other Plans |
|
2006 |
$1,000 |
$2,500 |
$5,000 |
|
2007 |
$1,000 |
$2,500 |
$5,000 |
|
2008 |
$1,000 |
TBA |
TBA |
1The limit is adjusted annually for inflation in $500 increments.
2IRA = Individual retirement account and TBA = to be announced.
Some farm families are experiencing high incomes and should consider this as an opportunity to save for retirement. In the long run, it may pay a lot better than buying depreciable assets as a strategy to save tax dollars.