Retirement Savings Contribution Credit
Low to middle income taxpayers may be able to claim the retirement savings contribution credit, sometimes known as the saver's credit, for taxpayers who make eligible contributions to certain tax-advantaged retirement plans. The saver's credit was enacted as a temporary provision in 2002, then became a permanent part of the tax code in 2006. The credit may be up to $1,000 for a contribution of $2,000, although because the credit is nonrefundable, the maximum amount will probably be limited by the taxpayer's ordinary income tax liability. The credit may be 10%, 20%, or even 50%, of contributions of up to $2,000, depending on the taxpayer's filing status, and modified adjusted gross income (MAGI), which is adjusted gross income (AGI) increased by any exclusion for foreign earned income or income from Puerto Rico or American Samoa, or by any foreign housing exclusion or deduction. For most Americans, their MAGI equals their AGI.
|Credit %||Single, |
A married couple filing jointly can each claim the credit for eligible contributions of up to $2,000 each. Contributions can be made by the due date of the return, not including extensions. The saver's credit is in addition to any other tax benefit to the retirement contribution.
Example 1: Joe and Mary file jointly. Joe, who makes a contribution of $1,000, is entitled to the 50% credit rate, yielding a credit of $500. Mary, who is eligble for the 20% rate, contributes $2,000, for a total credit of $400.
To be eligible for the credit, you must be at least 18 years of age by the end of the tax year, and cannot be claimed as a dependent by another taxpayer, nor can you be a full-time student during 5 or more months during the tax year.
Eligible retirement accounts include:
- traditional or Roth IRAs,
- SIMPLE IRAs,
- SIMPLE 401(k) or 403(b) plans,
- salary reduction SEP,
- salary reduction contributions to 401(k), 403(b), or 457(b) plans,
- voluntary after-tax contributions to a qualified plan.
To prevent taxpayers from receiving a distribution and then making a subsequent contribution to claim the saver's credit, tax rules reduce the eligible contribution by any distributions within the testing period, which covers the time beginning 2 years previous to the tax year until the due date of the current return, including extensions. So any distributions from retirement plans after 2012 but before the due date of 2015, including extensions, reduces the credit that can be claimed for 2015. Any distributions during that time period must be subtracted from the contributions that the taxpayer made during the tax year. However, trustee-to-trustee transfers to other eligible retirement accounts, such as rollover distributions or a conversion of a traditional IRA to a Roth IRA, or distributions of excess contributions, are not counted.
Example 2: To pay your 2014 taxes, you withdraw $1000 from your IRA in 2015. You make no contributions in 2014 or 2015, but you contribute $2000 in 2016. Your eligible contribution is $2000 – $1000 = $1000. If your credit percentage is 50%, then you can claim the smaller of:
- $1000 × .5 = $500 or
- your ordinary tax liability without the credit.
The saver's credit is figured on Form 8880, Credit for Qualified Retirement Contributions. Because the saver's credit is limited to ordinary income tax liability, not employment tax liability, and because other credits come before the saver's credit on Form 1040, those credits listed prior to the retirement savings contribution credit, such as the child tax credit, dependent care credit, American opportunity credit, and the lifetime learning credit, will limit the credit available. As a result, the average credit is less than $250.
Example: How Larger Retirement Contributions Can Greatly Increase Tax Savings
Although the saver's credit is limited to 50% of a $2000 contribution, the following example shows how a higher contribution can, nonetheless, significantly increase the allowable credit by decreasing AGI. Note that there is a $1500 difference between the maximum AGI for the 50% credit and the minimum AGI for the 10% credit. Note also that any distributions received for the current tax year, up to the due filing date, or the excess of distributions over contributions in the 2 previous years, must be subtracted from the current year contribution amount. However, if the difference between the contribution amount and the distributions is at least $2000, then it will not decrease the credit. The reason for this excess distributions provision is to prevent taxpayers from gaming the system, by claiming the saver's credit, then withdrawing the money later.
|Given: 2015 tax year, single filing status, 50 years old||50% Credit||20% Credit||10% Credit|
|On Form 1040, U.S. Individual Income Tax Return|
|IRA Contribution (increasing the contribution decreases AGI, thereby increasing the credit %)||$6,500||$5,500||$4,500|
|Adjusted Gross Income (Determines credit %)||$18,000||$19,000||$20,000|
|Tax (Line 44)||$770||$870||$970|
|On Form 8880, Credit for Qualified Retirement Contributions|
|Excess of Distributions Over Contributions in Prior 2 Years and Current Year, Up to Due Date|
(2013 to 2015)
|Qualified Contribution = IRA Contribution - Distributions =||$6,500||$3,000||$2,000|
|Credit Base = Greater of Qualified Contribution or $2,000||$2,000||$2,000||$2,000|
|On Form 8880: AGI Limits, Credit %: $18,250, 50%; $19,750, 20%; $30,500, 10%||0.5||0.2||0.1|
|Maximum Credit = Credit Base × Credit %||$1,000||$400||$200|
|Allowable Credit = Lesser of Maximum Credit or Tax Liability||$770||$400||$200|
The saver's credit is transferred to the Tax and Credits section of Form 1040. After that section comes the Other Taxes, where, if applicable, the self-employment tax and the healthcare individual responsibility payment, among other possible taxes, are added to the tax liability, which is why the saver's credit cannot be used to offset those taxes.