Saver’s Tax Credit: A Retirement Savings Incentive

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 tax credit, it allows qualified individuals to enjoy tax breaks above and beyond any tax deductions that they may receive from contributions to their individual retirement accounts (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, ABLE 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 (AGI).
  • This credit is not available to individuals under age 18, full-time students, or anyone claimed as a dependent by another taxpayer.
  • Taxpayers use Form 8880 to calculate and claim the Saver's Tax Credit.
  • This credit reduces taxes owed dollar for dollar.

What Is the Saver’s Tax 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, thrift savings plans (TPS), or governmental 457 plans. It is also available to those who contribute to traditional and/or Roth IRAs.

As of 2018, those who make contributions to tax-advantaged savings accounts for people with disabilities and their families (known as ABLE accounts) are eligible for the saver’s credit.

Depending on income levels (see charts below), the credit is worth either 10%, 20%, or 50% of a person’s eligible contribution. However, there are caps in place. The maximum contribution for those filing as head of household is $2,000, while the maximum for married couples filing jointly is $4,000. As a result, the maximum credit claimed for heads of household is $1,000 (50% x $2,000) and $2,000 for married couples filing jointly (50% x $4,000). Refundable credits and the adoption credit do not factor into the equation.

Who Is Eligible?

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 and cannot be claimed as a dependent on another's tax return. Also, they may not matriculate as a full-time student during the tax filing year. Finally, an individual’s adjusted gross income (AGI) must not exceed the following limits:

2022
Credit Rate Married Filing Jointly Head of Household All Other Filers
50% of your contribution AGI not more than $41,000 AGI not more than $30,750 AGI not more than $20,500
20% of your contribution $41,001–$44,000 $30,751–$33,000 $20,501–$22,000
10% of your contribution $44,001–$68,000 $33,001–$51,000 $22,001–$34,000
0% of your contribution  More than $68,000 More than $51,000 More than $34,000
2021
Credit Rate Married and Files a Joint Return Files as Head of Household Other Filers
50% Up to $39,500 Up to $29,625 Up to $19,750
20% $39,501–$43,000 $29,626–$32,250 $19,751–$21,500
10% $43,001–$66,000 $32,251–$49,500 $21,501–$33,000
0% More than $66,000 More than $49,500 More than $33,000

As the charts above illustrate, 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 the 2022 tax year. She contributes $800 to her employer-sponsored 401(k) plan, plus $600 to her traditional IRA. Jane is therefore eligible for a nonrefundable tax credit of $700 [($800 + $600 = $1,400) × 50%].

The Effect of the Saver’s Tax 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 retirement plan qualifies as a tax deduction. As a bonus, 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 2022. That year, she contributed $1,000 to her IRA, while her unemployed husband generated zero earnings. After deducting her IRA contribution, the AGI 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.

How to Claim the Saver’s Tax Credit

Taxpayers who contribute to qualified employer-sponsored retirement plans, IRAs, or ABLE plans are required to complete IRS Form 8880 to claim the Saver's Tax Credit. Taxpayers whose income does not exceed a prescribed amount for their tax filing status use this form to report their and their spouse's total contributions.

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).

Users enter their total contributions and adjusted gross income to determine the amount of their credit. Once calculated, they must enter the credit amount on Form 1040 and then file Form 8880 with their return.

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 specific 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—then that contribution is likewise ineligible for the saver’s credit.

How Can I Get the Saver’s Tax Credit?

To be eligible for the Saver's Tax Credit, you must be at least 18, not a full-time student during the tax filing year, and not claimed as a dependent on another's tax return. Your adjusted gross income (AGI) must not exceed the Saver's Tax Credit limit for your filing status, and you must have made contributions to a qualified retirement or ABLE plan for the tax filing year. To claim the credit, file Form 8880 with your tax return.

Who Qualifies for the Saver’s Tax Credit?

Taxpayers age 18 and older who are not full-time students or dependents of other taxpayers and who have incomes within certain limits may qualify for the Saver's Tax Credit. For married filing jointly, income must not exceed $41,000. Head of household income must not exceed $30,750, and all others' income must not exceed $20,500.

How Much Is the Saver’s Tax Credit?

The Saver's Tax Credit is either 10%, 20%, or 50% of the total amount contributed to a qualified retirement plan (QRP). The credit is based on the contribution amount and how much of that total qualifies for the credit. Adjusted gross incomes (AGI) in the top tier of a filing status receive 10% credit, whereas AGIs in the middle and bottom tiers receive 20% and 50%, respectively. The credit cannot exceed $2,000 for married filing jointly filers and $1,000 for single filers.

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.

Article Sources
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  1. Internal Revenue Service. “Publication 590-A: Contributions to Individual Retirement Arrangements (IRAs),” Pages 45-46.

  2. Internal Revenue Service. “Retirement Savings Contributions Credit (Saver’s Credit).”

  3. Internal Revenue Service. "2021 Form 8880," Page 2.

  4. U.S. Congress. “H.R.1 - An Act to Provide for Reconciliation Pursuant to Titles II and V of the Concurrent Resolution on the Budget for Fiscal Year 2018."

  5. Internal Revenue Service. "Publication 590-A: Contributions to Individual Retirement Arrangements (IRAs)," Page 46.

  6. U.S. Congress. “H.R.1836 - Economic Growth and Tax Relief Reconciliation Act of 2001."

  7. U.S. Congress. “H.R.4 - Pension Protection Act of 2006."

  8. Internal Revenue Service. "Publication 590-A: Contributions to Individual Retirement Arrangements (IRAs)," Page 33.

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