New retirement savings incentive may be an opportunity for "retirees".

• Author: Bakale, Anthony

The concept of retirement has changed. Today, rather than quitting work altogether, many people simply downshift from full-time employment to flextime or part-time positions, sometimes for the same employer, sometimes in completely different settings. Many baby-boomers hope to make this change as early in their lives as possible. Indeed, many have already done so. It has become quite common for people who have left their principal careers behind to continue working well into their 70s and beyond.

These early "retirees" may have modest taxable income, but still have adequate cashflow to support their living standards. For instance, a person changing to part-time work at 65 may delay receipt of Social Security benefits and withdrawals from qualified retirement plan accounts, and at the same time reallocate substantial investments into municipal bonds. The presence of compensation within that taxable income might allow an unexpected tax benefit, if a taxpayer is still willing to make contributions to a retirement plan or an IRA. A new credit intended to encourage saving for the traditional retirement years may be available to many people already in that age group.

For tax years 2002-2006, Sec. 25B provides a nonrefundable "savers credit" for "lower" income taxpayers who make voluntary contributions to certain qualified retirement plans, or to a traditional or Roth IRA. A taxpayer can claim the credit in addition to any deduction or exclusion that may otherwise apply. The credit is based on the amount the taxpayer contributed to any or all of these arrangements, net of any distributions received in (1) the immediately preceding two tax years and (2) the succeeding year, up to the return due date (including extensions). Eligible taxpayers must be over 18 (but not under any particular age), and cannot be full-time students or dependents of other taxpayers.

The maximum credit is $1,000 per individual or $2,000 for married joint filers, based on a $2,000 maximum creditable contribution at a 50% maximum credit rate. The credit is reduced in stages as adjusted gross income (AGI) increases. The full credit is only allowed for taxpayers with AGI up to $30,000 (married joint filers), $22,500 (heads of household) or $15,000 (all others); no credit is allowed when AGI exceeds $50,000, $37,500 or $30,000, respectively.

The interplay of this new credit and the other tax benefits of qualified retirement plans and IRAs can provide substantial leverage. When...