The IRS provides several tax-advantaged ways of saving for retirement, including 401(k)s and IRAs. There’s an additional and lesser-known tax credit available called a retirement saver’s credit which can help fund your retirement savings.
These savings can be worth up to $2,000 off your tax bill each year. Here’s how to claim your saver’s credit if you qualify.
What is the Retirement Savings Contribution Credit?
The saver’s credit can also be called “retirement savings contribution credit” and “retirement saver’s credit.” No matter what you call it, it’s a great way to offset some of the money you use to fund your eligible retirement accounts like your individual retirement account or your 401(k).
Because this tax benefit is structured as a credit, it has a dollar-for-dollar effect on your tax bill when you file taxes, which makes it more powerful than a tax deduction. (A tax deduction can only lower your taxable income total.)
How the Saver’s Credit Works
The saver’s credit can reduce your tax bill by up to $2,000 for married couples or up to $1,000 for single filers, though it’s a non-refundable credit. This means the credit can reduce your tax bill all the way down to $0 in some cases, but it can’t generate a refund.
For example, if you qualify for the full $2,000 saver’s credit as a married couple filing jointly and your taxes for the year are $1,600, the credit can reduce your tax bill to $0, but you’re not eligible for a refund of $400.
The saver’s credit is designed to help low and moderate-income households save for retirement, which means there are some income limits to keep in mind when filing your taxes.
A tax credit of 50 percent of your qualified contributions is available for lower-income tax filers. As taxable income increases, the saver’s credit available is reduced to 20 percent and then 10 percent, eventually phasing out.
The saver’s tax credit only applies to the first $2,000 of your qualified contributions. Contributions above the $2,000 per person cap may have other tax advantages, like tax deferment or taxable gross income reductions but can’t be used to claim the saver’s credit.
The saver’s credit has several eligibility requirements:
- Individuals age 18 or older
- Individuals who are not full-time students
- Individuals who aren’t claimed as a dependent on another person’s tax return
Some income qualifications apply as well. Based on your adjusted gross income (AGI), you may be eligible for the full credit of 50 percent or a reduced credit of 20 percent or 10 percent of your qualified contributions as AGI reaches threshold limits. Higher income levels are phased out and aren’t eligible for the saver’s credit.
To earn the full saver’s credit if you are married and filing jointly, your adjusted gross income would have to be at or below $38,500. A married couple filing jointly with an adjusted gross income of $38,501 to $41,500 would be eligible for a credit of 20 percent of their qualified contributions, or up to $800 for the saver’s credit.
The last tier of $41,501 to $64,000 reduces the saver’s credit to 10 percent of qualified contributions and couples filing jointly become ineligible for the credit if their adjusted gross income exceeds $64,000
The IRS provides the following saver’s tax eligibility table for 2019:
|Credit Rate||Married Filing Jointly||Head of Household||All Other Filers*|
|50% of your contribution||AGI not more than $38,500||AGI not more than $28,875||AGI not more than $19,250|
|20% of your contribution||$38,501 - $41,500||$28,876 - $31,125||$19,251 - $20,750|
|10% of your contribution||$41,501 - $64,000||$31,126 - $48,000||$20,751 - $32,000|
|0% of your contribution||more than $64,000||more than $48,000||more than $32,000|
*Single, married filing separately or qualifying widow(er)
Single filers can earn the full credit with an adjusted gross income of $19,250. Married couples filing jointly can earn the full credit with a combined adjusted gross income of up to $38,500.
It’s also important to note that adjusted gross income can be reduced in a number of ways, including 401(k) contributions or contributions to an individual IRA. Because of these income adjustments, tax filers with a higher gross income may still qualify for the saver’s credit.
For example, a single filer earning $50,000 per year but who maxed out his 401(k) contribution at 2019’s limit of $19,000 may still qualify for the 10 percent tier of the saver’s credit.
Self-employment taxes, alimony, HSA contributions, charitable contributions and other approved expenses or other approved income deductions may also reduce your adjusted gross income. This helps you to qualify for the saver’s credit or to increase the amount of your credit.
Contributions to Roth IRAs, while eligible for the saver's credit in many cases, can’t be used to reduce your AGI.
Types of eligible accounts
A number of account types are eligible for contributions that can earn the saver’s credit:
- Roth IRA
- SIMPLE IRA
- Thrift Savings Plan
SEP IRA contributions for self-employed retirement plans can be used to qualify for the saver’s credit. Be aware, however, that the saver’s credit only applies to amounts you contribute to a qualified plan. Employer contributions or rollovers from an existing retirement plan can’t be used to qualify for the saver’s credit.
What Determines the Saver's Credit Value
The saver’s credit only applies to qualified contributions of up to $2,000 for single filers or $4,000 for married couples filing jointly. The percentage of your qualified contributions eligible for the saver’s credit is then determined by your adjusted gross income.
For example, let’s say a single filer with an adjusted gross income of $19,250 has contributed $3,000 to qualified retirement savings plans.
Only $2,000 can be used to calculate the saver’s credit. Because the AGI falls within the range that earns a 50 percent credit, the single filer has earned a $1,000 tax credit. If he owes $1,500 on his taxes, the amount due is reduced to $500.
Similarly, if a single filer with an AGI below $19,250 contributes $1,500 to qualified accounts, the saver’s credit would be $750.
For a married couple, the maximum amount of the saver’s credit can be as high as $2,000 with qualified retirement savings contributions of $4,000 or higher. Contributions above the $2,000 individual limit can’t be used to calculate the saver’s credit.
Additionally, if one spouse contributes an amount above the $2,000 individual limit and the other spouse contributes an amount below the limit or doesn't contribute at all, the surplus contribution from the first spouse can’t be used to qualify for a saver’s credit for the second spouse.
For example, if you contribute $5,000 and your spouse contributes $1,000 to qualified accounts, only $3,000 can be used to calculate the saver’s credit: $2,000 for you and $1,000 for your spouse.
How to Claim the Saver's Credit
Claiming the saver's credit is a straightforward process as long as you complete an additional tax form.
Documents You’ll Need
You’ll need the year-end paperwork provided to you by your qualified plan administrator to verify your voluntary contribution amounts. For IRAs, this is Form 5498. For 401(k) contributions, see your W-2, which documents your tax-deductible contributions.
Your plan trustee is also required to submit tax forms to the IRS and it’s important that the numbers you submit match the records the IRS already has from your plan trustee.
Where You Claim it on Your Tax Forms
IRS Form 8880 is the key to claiming the saver’s tax credit. This one-page form and worksheet can help you calculate the amount of the credit and provide instructions regarding eligibility. The amounts calculated on Form 8880 are then transferred to your 1040 form, which reduces your tax liability if you are eligible for the saver’s credit.
For married couples filing jointly, the qualified contributions used for the saver’s credit are calculated independently for each spouse but a $4,000 combined contribution limit still applies.
Making the Most of the Saver’s Credit
If you’re already contributing to a qualified retirement account, the saver’s credit is a great reward. Always consider the tax implications when planning your contributions to a qualified retirement account.
The difference can add up to thousands of dollars over time if you choose where and when to contribute without considering the tax benefits available to you as well.