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 retirement plans. 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.

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, which, for 2011 returns, is April 17, 2012. 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 up to $1,000, is entitled to the 50% credit rate, yielding a credit of $500. Mary, who is entitled to a 20% rate, contributes $2,000, for a total credit of $400.

The taxpayer 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 the taxpayer 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) plans,
• government Section 457 plan,
• voluntary after-tax contributions to a qualified plan or 403(b) 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 return, including extensions. So any distributions from retirement plans after 2008 but before the due date of 2011, including extensions, reduce the credit that can be claimed for 2011. 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.

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.