Here's an added incentive to save for retirement—a non-refundable tax credit known as the retirement savings contribution credit (the "saver's credit" for short). Meet the income requirements and actual money comes off your tax bill.
Let's face it: Funding a retirement plan is not always a priority, and you may need your disposable income to cover more immediate needs. But this opportunity really ups the ante for making room for retirement savings. Why? Because this credit comes in addition to any tax deduction you get for your contributions to a traditional IRA or employer-sponsored plan. The credit and your deduction reduce your tax liability to the IRS and offset the cost of funding a retirement account.
- The saver's credit is a tax credit for eligible taxpayers who contribute to an employer-sponsored retirement plan or a traditional and/or Roth IRA.
- The amount of the credit is based on your retirement plan contributions, tax filing status, and adjusted gross income (AGI).
- Anyone who is under age 18, a full-time student, or a dependent claimed on someone else's tax return is not eligible for this credit.
- Excess contributions, rollovers, and certain retirement fund distributions cannot be considered for the saver's credit.
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 plan, and/or make contributions to traditional and/or Roth IRAs. Starting in 2018, contributions to ABLE accounts, which are tax-advantaged savings accounts for people with disabilities and their families, are also eligible.
The credit is worth 10%, 20%, or 50% of your eligible contribution, up to a total of $2,000 ($4,000 if married filing jointly), which means it can't be more than $1,000 (or $2,000 if married filing jointly; see the table below). The maximum credit amount is the lesser of either $1,000 or the tax amount you would have had to pay without the credit. Refundable credits and the adoption credit are not taken into consideration in determining the amount of the saver's credit.
Who Is Eligible?
In order to be eligible for the saver's credit, you must be at least 18 years old by the end of the applicable tax year, not a full-time student, and not claimed as a dependent on another taxpayer's return. Students should check with the school they attend to determine its definition of "full-time" (this can vary) and read the instructions for IRS Form 8880 for its definition.
The other criterion for the credit is that your adjusted gross income (AGI) must not exceed the following limits:
|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 you can see from the chart, the lower an individual's AGI, the higher the saver's credit, which helps increase the incentive for lower-income taxpayers to fund their retirement accounts.
Example 1 Jane, whose tax-filing status is "single," has an AGI of $19,200 for tax year 2019. Jane contributes $800 to her employer-sponsored 401(k) plan and another $600 to her traditional IRA. Jane is therefore eligible for a non-refundable tax credit of $700 [($800 + $600 = $1,400 x 50%].
Starting in 2018, contributions to tax-advantaged savings accounts for people with disabilities and their families, known as ABLE accounts, are eligible for the saver's credit.
The Effect of the Saver's Credit
By contributing to a retirement plan and claiming the saver's credit, you can reduce the amount of income tax you owe to the IRS in two ways. First, your plan contributions are a deduction that lowers your taxable income. Second, the saver's credit reduces the actual taxes you pay, dollar for dollar. Here's how the IRS illustrates this point:
Example 2 Jill, who works at a retail store, is married and earned $38,000 in 2018. Jill’s husband was unemployed in 2018 and didn’t have any earnings. Jill contributed $1,000 to her IRA in 2018. After deducting her IRA contribution, the adjusted gross income shown on her joint return is $37,000. Jill may claim a 50% credit, $500, for her $1,000 IRA contribution.
When Are Retirement Savings Not Eligible?
Any amount that you contribute to a retirement account in excess of the allowable limit has to be corrected by removing the excess within certain time frames. Contributions that are returned to you are not eligible for the saver's credit.
Similarly, when you roll over money from one retirement account to another—say, from an employer-sponsored 401(k) to a traditional IRA when you change jobs—those contributions are not eligible for the saver's credit.
Distributions from your retirement plans during what is called the "testing period" also may reduce the allowable saver's credit amount or result in your being ineligible for the credit. The testing period is the two years preceding the year for which the credit is claimed, or January 1 to April 15 of the year following the year for which the credit is claimed. If, for instance, the saver's credit is claimed for 2019, distributions that occur during tax years 2017 and 2018, and from January 1, 2020, to April 15, 2020, could affect your eligibility to claim the credit.
The Bottom Line
The saver's credit was made available for tax years 2002 to 2006 under the Economic Growth and Tax Relief Reconciliation Act of 2001(EGTRRA), and was made permanent under the Pension Protection Act of 2006 (PPA). If you are eligible and don't take advantage of this credit, keep in mind that you are passing up the value of the saver's credit to reduce taxes you would otherwise pay, as well as the opportunity to fund your retirement nest egg. Pay yourself, not Uncle Sam.