Many people struggle to carve out the funds they need to build up their retirement nest eggs. Fortunately, a non-refundable tax credit, known as the retirement savings contribution credit, can make it substantially easier to save. Often referred to as the saver's credit, it lets qualified individuals enjoy tax breaks above and beyond any tax deductions they may receive from contributions to their IRAs or employer-sponsored plans. By reducing tax liability, the credit offsets the cost of funding a retirement account, ultimately bolstering savings potential.

Key Takeaways

  • The saver's credit is available to eligible taxpayers who contribute to an employer-sponsored retirement plan or a traditional and/or Roth IRA.
  • The credit amount is determined by multiple factors, such as an individual's retirement plan contributions, tax filing status, and adjusted gross income.
  • This credit is not available to individuals under the age of 18, full-time students, or anyone claimed as a dependent by another taxpayer.

What Is the Saver's Credit?

The saver's tax credit is a non-refundable tax credit available to eligible taxpayers who make salary-deferral contributions to employer-sponsored 401(k), 403(b), SIMPLE, SEP, or governmental 457 plans. It is likewise available to those who contribute to traditional and/or Roth IRAs. Starting in 2018, those who made contributions to tax-advantaged savings accounts for people with disabilities and their families (known as ABLE accounts) became eligible for the saver's credit.

Depending on income levels (see chart below), the credit is worth either 10%, 20%, or 50% of a person's eligible contribution, but there are caps in place. The maximum allowable credit for those filing as Head of Household is $2,000, while married couples filing jointly may claim up to $4,000. Refundable credits and the adoption credit do not factor into the equation.

Who Is Eligible?

In order to be eligible for the saver's credit, an individual must be at least 18 years old by the end of the applicable tax year. He or she may not matriculate as a full-time student and may not be claimed as a dependent on another taxpayer's return. Finally, an individual's adjusted gross income (AGI) must not exceed the following limits:

2019
Credit Rate Married and Files a Joint Return Files as Head of Household Other Filers
50% Up to $38,500 Up to $28,875 Up to $19,250
20% $38,501 – $41,500 $28,876 – $31,125 $19,251– $20,750
10% $41,501 – $64,000 $31,126– $48,000 $20,751 – $32,000
0% More than $64,000 More than $48,000 More than $32,000

As the chart illustrates, the lower an individual's AGI is, the higher the saver's credit becomes.

For example, Jane, whose tax-filing status is single, has an AGI of $19,200 for tax year 2019. She contributes $800 to her employer-sponsored 401(k) plan, plus $600 to her traditional IRA. Jane is therefore eligible for a non-refundable tax credit of $700 [($800 + $600 = $1,400) x 50%].

The Effect of the Saver's Credit

Claiming a saver's credit when contributing to a retirement plan can reduce an individual's income tax burden in two ways. First, the contribution to the plan itself qualifies as a tax deduction. Second, the saver's credit reduces the actual taxes owed, dollar for dollar.

Consider the following example. Jill, a married retail clerk, earned $38,000 in 2018. That year, she contributed 1,000 to her IRA, while her unemployed husband generated zero earnings. After deducting her IRA contribution, the adjusted gross income shown on her joint return is $37,000. In this case, Jill is entitled to claim a 50% credit of $500 for that IRA contribution.

When Are Retirement Savings Not Eligible?

Any money contributed to a retirement account that exceeds the allowable limit must be divested from the account within a certain time frame. The returned portion of the contribution is not eligible for the saver's credit. Similarly, if an individual changes jobs and consequently rolls money over from one retirement account into another—say, from an employer-sponsored 401(k) to a traditional IRA—that contribution is likewise ineligible for the saver's credit.

The saver's credit was initially made available for tax years 2002 to 2006 under the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA). It became permanent under the Pension Protection Act of 2006 (PPA).

The Bottom Line

The saver's credit can effectively boost an individual's retirement savings power. Those who qualify for this credit and don't capitalize on this opportunity are squandering a simple way to add significant value to their nest eggs.