Saving for retirement isn’t always easy, but there are significant tax benefits to low- and moderate-income families who choose to prioritize these long-term savings. The Retirement Savings Contributions Credit (otherwise known as the “Saver’s Credit”) is a tax credit designed to encourage retirement savings. It makes it possible for individual filers to receive up to $1,000 as a tax credit, while married couples filing jointly can receive up to $2,000.
The best news is that the Saver’s Credit works with any other retirement-based tax incentives you already benefit from. For instance, if you can deduct your 401(k) contributions from your taxes, you may still be able to use the Saver’s Credit, reducing your tax liability even further.
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Saver’s Credit Eligibility
Not everyone is eligible for the Saver’s Credit since it’s a tax credit designed to encourage low- to moderate-income families to start saving for retirement. Therefore, there are limits on age, income level, and filing status.
First and foremost, the following individuals are ineligible for the credit:
- Those under 18 years of age
- Those who are full-time students
- Those who can be claimed as a dependent on anyone else’s tax return
If none of these apply to you, then you may be eligible for a 10%, 20%, or 50% tax credit on your retirement contributions, up to a total contribution of $2,000 for an individual or $4,000 for a married couple filing jointly. That means an individual can receive a credit of up to $1,000 if they contribute $2,000 to a retirement account, while a couple can receive a credit of up to $2,000 if they each contribute $2,000 to their individual retirement accounts (50% of a $4,000 retirement contribution).
Filing Status and Income Level
How much of a credit that you’re eligible for is based on your filing status and income level.
- Married Filing Jointly. If you’re married filing jointly for the tax year 2019, you may qualify for a credit if your adjusted gross income is $64,000 or less. The full 50% credit is for married couples making less than $38,500; the 20% credit is for those making between $38,501 and $41,500; and the 10% credit is for those making between $41,501 and $64,000.
- Head of Household. If you’re filing as a head of household for the tax year 2019, you may qualify for a credit if your adjusted gross income is $48,000 or less. The full 50% credit is for individuals making less than $28,875; the 20% credit is for those making between $28,876 and $31,135; and the 10% credit is for those making between $31,126 and $48,000.
- Single, Married Filing Separately, or Widow(er). If you’re filing as any of these statuses for the tax year 2019, you may qualify for a credit if your adjusted gross income is $32,000 or less. The full 50% credit is for individuals making less than $19,250; the 20% credit is for those making between $19,251 and $20,750; and the 10% credit is for those making between $20,751 and $32,000.
Remember, the credit is limited to a percentage of your retirement contributions. For instance, if a married couple filing jointly has an adjusted gross income of $39,000, and each contributes $500 to their respective retirement accounts, they would qualify for a 20% tax credit on the total contribution of $1,000. In other words, they would qualify for a $200 tax credit (20% of $1,000 is $200).
According to the Congressional Research Service, for the tax year 2016, only 5.6% of all taxpayers claimed the Saver’s Credit, and the average credit amount claimed was $182.
Eligible Retirement Contributions
Almost all retirement plan contributions qualify for the Saver’s Credit, including those contributed to the following accounts:
- Traditional or Roth IRA
- SIMPLE IRA
- ABLE accounts
If you participate in an employer-match retirement fund, monies invested by your employer are not eligible for the credit, but your own contributions are eligible. For instance, if you contributed $500 to your 401(k) and your employer matched your contribution, only the $500 you contributed would be eligible for the Saver’s Credit.
Finally, if you recently took distributions from a retirement account, your eligibility could be reduced. In other words, if you contributed $2,000 to a retirement account, but you took a distribution of $1,000, your total saver’s credit eligibility would be reduced to $1,000 — the difference between the amount you contributed and the amount you received as a distribution.
Increased Benefit, Decreased Tax Liability
Like other tax credits, the Saver’s Credit decreases your total tax liability. The amount of tax you owe is directly reduced by the amount of credit you’re eligible for. For instance, if you owe $2,000 to the IRS but have a Saver’s Credit of $500, your tax bill would be reduced to $1,500.
However, it’s important to note that the Saver’s Credit itself is a “nonrefundable” credit. In other words, while the credit can reduce your tax liability to $0, you can’t use any “leftovers” to receive a tax refund. For instance, if your total tax liability for 2019 was $516, and you qualified for the full $1,000 Saver’s Credit, your tax liability would simply go down to $0 — you wouldn’t be able to take the remaining $484 as a tax refund.
That said, because the Saver’s Credit applies to the first $2,000 an individual voluntarily contributes to retirement (or $4,000 for a married couple filing jointly), taking this credit makes it possible for other refundable credits to add up. The result is either a lower tax bill to Uncle Sam or a greater end-of-year refund.
Claiming the Saver’s Credit
To include the Saver’s Credit on your 2019 tax refund, simply fill out IRS Form 8880 and turn it in with your 1040. Most tax prep software programs like H&R Block or TurboTax will determine if you’re eligible, fill out the appropriate forms, and apply the savings to your tax bill.
Even if you didn’t make significant retirement contributions in 2019, or you want to make more, you still have time to take advantage of the Saver’s Credit. Contributions invested in either a Roth or traditional IRA before April 15, 2020, can be claimed on your 2019 tax return. Unfortunately, contributions to an employer retirement fund, such as a 401(k) or 403(b), must be made by December 31, 2019, to qualify for the 2019 tax year.
The Retirement Savings Contributions Credit is a permanent addition to the tax code, so even if you’re unable to take advantage of the credit for 2019, start planning for the future. Talk to your employer about setting up automatic contributions to your retirement account at work, or talk with your bank or a financial planner to help you determine which individual retirement account is right for you.
Saving for retirement is an incredibly important part of long-term financial planning, and the tax benefits for saving are significant. Enjoy long-term financial stability with regular contributions while also enjoying annual reductions in your tax liability. It’s like having your cake and eating it too.
Have you used the Saver’s Credit to reduce your tax liability? What can you do to enable you to use it in the future?