Retirement Savings Contribution Credit (Saver's Credit)
Low to middle income taxpayers may be able to claim the retirement savings contribution credit, usually called 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 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, MAGI = AGI.
| Credit % | Single, Married Filing Separately, Qualifying Widower | Head of Household | Married Filing Jointly |
|---|---|---|---|
| 2024 | |||
| 50% | $23,000 | $34,500 | $46,000 |
| 20% | $25,000 | $37,500 | $50,000 |
| 10% | $38,250 | $57,375 | $76,500 |
| 2023 | |||
| 50% | $21,750 | $32,625 | $43,500 |
| 20% | $23,750 | $35,625 | $47,500 |
| 10% | $36,500 | $54,750 | $73,000 |
| Source: Retirement Savings Contributions Savers Credit | |||
The saver's credit is in addition to tax benefit of the retirement contribution if the contribution is to a tax-deferred account, such as a traditional IRA:
Total Tax Savings = Saver’s Credit + Retirement Contribution × Marginal Tax Rate
Example: Total Tax Savings = Saver's Credit + Marginal Tax Savings
| Wage | $29,000 | |
| Retirement Contribution | $7,000 | |
| Adjusted AGI | $22,000 | Qualifies for 50% Credit Rate |
| Credit Rate | 50% | |
| Saver's Credit | $1,000 | = 50% × Lower of (Contribution or $2,000) |
| Marginal Tax Rate | 10% | |
| Marginal Tax Savings | $700 | = Retirement Contribution × Marginal Tax Rate |
| Total Tax Savings | $1,700 | = Saver's Credit + Marginal Tax Savings |
If you also qualify for the Premium Tax Credit (Obamacare Credit), then lowering your AGI with a retirement contribution will also increase your Premium Tax Credit, increasing your tax savings even more.
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.
Example: Calculating the Saver's Credit for a Married Couple Filing Jointly
- Joe and Mary file jointly, with a MAGI of $40,000.
- Joe contributes $1,000 to his account.
- Mary contributes $2000 to her account.
- This reduces their MAGI by $3000, to $37,000, which qualifies for the 50% credit.
- So their total credit is the lower of $1500 (= 50% × $1000 + 50% × $2000) or tax liability.
Starting in 2027, taxpayers may receive a federal matching contribution on their retirement contribution that must be deposited in their IRA or retirement plan and cannot be withdrawn without penalty. This benefit replaces the saver's credit, but unlike the savers credit, it is not limited by tax liability.
Although you can receive this government match by contributing either to a traditional IRA or a Roth IRA, the government match must be placed in a traditional IRA or other tax-deferred account. The government giveth, but then it wants to taketh some of that away later.
Like the saver's credit, the match phases out based on income, which will be adjusted annually for inflation:
- married filing jointly: $41,000 – $71,000
- head of household: $30,750 – $53,250
- single: $20,500 – $35,500
A designated beneficiary of an ABLE (A Better Life Experience) account may also claim the savers credit for contributions.
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 in 2018 and 2019 will reduce or eliminate any retirement credit that can be claimed for 2020, up until the due date of the 2020 return in 2021, including extensions. 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: Calculating the Saver's Credit after Withdrawing a Retirement Contribution in a Previous Year
- To pay your taxes for the previous year, you withdraw $1000 from your IRA in Year 1.
- You make no contributions in Year 1 or Year 2, but you contribute $2000 in Year 3.
- 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, other credits that you can claim, such as the child tax credit, dependent care credit, American opportunity credit, and the lifetime learning credit, will limit the credit available.