What retirement accounts are actually available to you on a lower income

If you earn less than $75,000 a year, you have the same retirement account options as anyone else — but some of them work better for your situation because of tax breaks designed specifically for lower earners. A traditional IRA lets you set aside up to $7,000 per year (or $8,000 if you're 50 or older) and deduct it from your taxes right now. A Roth IRA takes after-tax money but grows tax-free forever. A SEP IRA or Solo 401(k) exists if you're self-employed. And if your employer offers a 401(k), that's usually the strongest option because the money comes out before taxes and many employers match what you contribute.

The real advantage for lower-income savers is the Saver's Credit — a federal tax credit that can give you money back on your taxes if you contribute to a retirement account and earn below certain thresholds. This is not a loan you repay; it's a direct credit. For 2024, you can claim it if you earn under roughly $68,250 (single) or $136,500 (married filing jointly), though the exact limit depends on your filing status. The credit covers contributions to IRAs, 401(k)s, and some other accounts.

Key Takeaways

  • The Saver's Credit gives lower-income workers a tax credit (not a deduction) worth 10 to 50 percent of what they contribute to retirement accounts, up to $1,000 per person per year.
  • A traditional IRA is the simplest account to open on your own, costs nothing to set up, and lets you deduct contributions from your taxes immediately.
  • A Roth IRA makes sense if you expect to be in a higher tax bracket later or want to withdraw money tax-free in retirement without required withdrawals.
  • If your employer offers a 401(k) with a match, contributing enough to get the full match is usually the highest-return investment available to you.
  • Self-employed workers can set aside more money in a SEP IRA or Solo 401(k) than in a regular IRA, and still claim the Saver's Credit.

How the Saver's Credit actually works and what it's worth

The Saver's Credit is claimed on your tax return (Form 8880) and is worth between 10 and 50 percent of the money you contribute to a retirement account during the year. The exact percentage depends on your income. If you're single and earn under $34,125, you can get back 50 percent of your contributions (up to $1,000 per person per year, so a maximum credit of $500). The percentage steps down as your income rises, and the credit phases out entirely around $68,250 for single filers.

This is different from a tax deduction. A deduction reduces the income you're taxed on; a credit reduces the taxes you owe dollar-for-dollar. If you contribute $2,000 to a traditional IRA and earn $30,000, you might get a $1,000 credit back on your taxes. You also deduct the $2,000 from your taxable income, so you're getting a two-part benefit. The catch is that you have to actually file a tax return to claim it — if you normally don't file because your income is too low, you'll need to file to get this credit.

Many lower-income workers don't know this credit exists, and many tax preparers don't mention it. If you've contributed to a retirement account in past years and didn't claim the credit, you can file an amended return (Form 1040-X) going back three years to recover the money.

Traditional IRA vs. Roth IRA: which makes sense for your income level

A traditional IRA is the most straightforward choice for most lower-income savers. You open one at any bank or brokerage (Vanguard, Fidelity, Schwab, or even your own bank), contribute money, and deduct it from your taxable income that year. The money grows without being taxed until you withdraw it in retirement, at which point you pay income tax on the full amount. You can contribute up to $7,000 per year (or $8,000 if you're 50 or older). If you have a workplace 401(k), there are income limits on how much of your IRA contribution you can deduct, but those limits are high enough that most lower-income workers won't hit them.

A Roth IRA works backwards: you contribute after-tax money (no deduction now), but the money grows tax-free and you withdraw it tax-free in retirement. You also don't have to take withdrawals at any age, which matters if you don't need the money. The trade-off is that you get no tax break today. A Roth makes sense if you think your tax bracket will be higher in retirement, or if you want maximum flexibility in retirement, or if you're young and have decades for the money to grow tax-free. For lower-income workers, a traditional IRA is usually better because the Saver's Credit gives you an immediate return, and you're likely in a lower tax bracket now than you will be later.

One important note: if you earn too much, you can't contribute to a Roth IRA directly. For 2024, the income limit is around $146,000 (single) or $230,000 (married). If you're over that limit, you can still do a "backdoor Roth" by contributing to a traditional IRA and converting it, but that's a more complex move.

Employer 401(k) plans and the employer match

If your employer offers a 401(k), that's usually your best first move, especially if they offer a match. An employer match means the company contributes money to your account based on what you contribute — commonly 50 cents for every dollar you contribute, up to 3 or 6 percent of your salary. That's an immediate 50 percent return on your money, which beats almost any other investment. If your employer matches and you're not contributing enough to get the full match, you're leaving assistance programs on the table.

A 401(k) contribution comes out of your paycheck before taxes, so you get an immediate tax deduction. For 2024, you can contribute up to $23,500 per year (or $31,500 if you're 50 or older). The money grows tax-deferred, and you pay taxes on withdrawals in retirement. You can't touch the money before age 59½ without a penalty (with narrow exceptions), so it's truly locked away until retirement.

The downside of a 401(k) is that you have limited investment choices — only what your employer's plan offers. An IRA gives you access to any investment available at your brokerage. Also, 401(k)s have higher fees than IRAs in many cases. But the employer match usually outweighs those concerns. If your employer doesn't offer a match, an IRA might be a better choice because of lower fees and more control.

SEP IRA and Solo 401(k) for self-employed workers

If you're self-employed or have side income, you can set aside more money for retirement than a regular IRA allows. A SEP IRA (Simplified Employee Pension) lets you contribute up to 25 percent of your net self-employment income, up to $69,000 per year (for 2024). A Solo 401(k) (also called an individual 401(k)) lets you contribute as both an employee and an employer, potentially allowing higher total contributions. Both accounts are tax-deductible and grow tax-deferred.

A SEP IRA is simpler to set up and maintain — you open it at a brokerage and make contributions. A Solo 401(k) requires more paperwork but gives you more flexibility, including the option to borrow against your balance. For most self-employed people with lower income, a SEP IRA is the easier choice. You can still claim the Saver's Credit on contributions to either account.

The catch is that if you have employees, a SEP IRA requires you to contribute the same percentage for them as you do for yourself. A Solo 401(k) only applies to you and your spouse (if applicable), so it's better if you have employees but want to save more for yourself.

How much you should actually contribute each year

The honest answer is: as much as you can afford without cutting into your emergency fund or essential expenses. Retirement saving only works if you can stick with it for decades. Contributing $100 per month consistently beats contributing $500 one year and nothing the next.

If you have an employer 401(k) with a match, contribute enough to get the full match first. If your employer matches 3 percent of your salary, contribute at least 3 percent. After that, if you have money left over, max out a Roth or traditional IRA ($7,000 per year) before putting more into the 401(k), because IRAs have lower fees and more investment choices.

If you don't have an employer plan, start with whatever you can afford in a traditional IRA — even $50 per month adds up. The Saver's Credit means the government is essentially matching part of your contribution, so the real cost to you is less than what you put in.

Common mistakes lower-income savers make

The first mistake is not claiming the Saver's Credit. Thousands of lower-income workers contribute to retirement accounts and never file a tax return, so they never get the credit. If you earn under $68,250 and contribute to a retirement account, file a return even if you don't owe taxes — the credit might give you a refund.

The second mistake is cashing out a 401(k) or IRA early when you change jobs or hit a rough patch. Withdrawals before age 59½ trigger a 10 percent penalty plus income taxes, which can wipe out years of growth. If you leave a job, roll the 401(k) into an IRA instead of cashing it out. If you're in a hardship, look for other options first — some 401(k)s allow loans, and IRAs have narrow exceptions for medical expenses or first-time home purchases.

The third mistake is not opening an account at all because you think you don't earn enough. There's no minimum income to open an IRA or contribute to a 401(k). Even if you earn $20,000 per year, you can contribute and claim the Saver's Credit.

Frequently Asked Questions

Can I have both a traditional IRA and a Roth IRA?

Yes, but your total contributions to both accounts combined can't exceed $7,000 per year (or $8,000 if you're 50 or older). You might split the contribution — say, $4,000 to a traditional IRA and $3,000 to a Roth — but the combined total is the limit. This can make sense if you want some tax-free growth (Roth) and some immediate tax savings (traditional).

What happens to my retirement account if I lose my job?

If you have a 401(k) and leave your job, you can roll it into an IRA at any brokerage without paying taxes or penalties. You have 60 days to complete the rollover. If you have an IRA, it stays yours regardless of employment — it's your account, not your employer's. An employer 401(k) belongs to you once it's vested, but unvested employer contributions may be forfeited when you leave.

Do I have to start withdrawing money at a certain age?

Yes, for traditional IRAs and 401(k)s, you must start taking required minimum distributions (RMDs) at age 73 (as of 2023; this age has been rising). Roth IRAs have no required withdrawals during your lifetime. If you don't take the RMD, you pay a penalty on the amount you should have withdrawn. This is one reason a Roth can be appealing if you don't need the money in retirement.

What if I'm behind on bills — should I still contribute to retirement?

If you're behind on essential bills or don't have an emergency fund, focus on those first. Retirement accounts are meant to be untouched for decades. That said, if your employer offers a match, even a small contribution to capture the match is worth it — that's immediate assistance programs. Once you have a small emergency fund (even $500 to $1,000), you can start building retirement savings alongside it.

Can I withdraw money from my IRA to buy a house?

First-time homebuyers can withdraw up to $10,000 from a traditional or Roth IRA without the 10 percent early withdrawal penalty, though you still pay income taxes on the withdrawal from a traditional IRA. This is a one-time exception. If you're saving for a down payment and have a lower income, this might be worth considering, but it does reduce your retirement savings, so weigh the trade-off carefully.