What is the Saver’s Tax Credit?

One of the most overlooked tax credits is also one of the best. If you qualify for this credit, the government actually pays you to contribute to your retirement account. It’s called the Saver’s Credit (officially the “Retirement Savings Contributions Credit”), and it’s one you don’t want to miss.

The Saver’s Credit is designed to help low to moderate income earners who put money into a 401(k), IRA, or similar retirement fund.  If you qualify, the Saver’s Credit can save you up to $1,000, or $2,000 if you are filing jointly.

How to qualify

As with any tax credit, there are certain requirements you must meet to qualify for the savings:

1. You have to be making retirement account contributions
2. You have to be at least 18 years old
3. You cannot be a full-time student
4. You cannot be claimed as a dependent on someone else’s tax return
5. Your Adjusted Gross Income (AGI) must fall below the specified level

You should be able to know fairly quickly if you meet qualifications one through four.  However, figuring out if you fall into the eligible income category might be a little trickier.  We’ll help you sort through it.

Income Limits

Your AGI is your total income minus certain reductions. Figuring out your AGI with tax software like TurboTax is a snap. For most people, a good rule of thumb is that your AGI is your gross income less any elective deferrals or deductible contributions to a retirement account.

Once you figure out your AGI, you just have to see whether you fall below the AGI limits.

2014 Saver’s Tax Credit Income Limits

• If you’re a single filer this year, your AGI limit is $29,500
• If you’re the head of a household, your limit is $44,275
• If you’re a married couple or joint filer, your limit is $59,000

2013 Saver’s Tax Credit Income Limits

• If you’re a single filer this year, your AGI limit is $30,000
• If you’re the head of a household, your limit is $45,000
• If you’re a married couple or joint filer, your limit is $60,000

2012 Saver’s Tax Credit Income Limits

• If you’re a single filer this year, your AGI limit is $28,750
• If you’re the head of a household, your limit is $43,125
• If you’re a married couple or joint filer, your limit is $57,500

(Source: IRS (2013) and IRA 2014)

Depending on your income, your tax bill will be reduced by a percentage of the amount you contribute to your retirement fund—ranging from 10% to 50%.  You’ll use IRS Form 8880 to figure out the exact amount, or use a program like TurboTax, which figures it out for you.

Qualifying retirement accounts

Contributions to just about any retirement account qualify for the credit. In addition to contributions to a traditional or Roth IRA, you can also contribute to any of the following:

1. Elective deferrals (including after-tax Roth contributions, if available) to a:
   • 401(k) plan (including a SIMPLE 401(k) and the federal Thrift Savings Plan),
   • SIMPLE IRA plan
   • SARSEP
   • 403(b) annuity
   • governmental 457(b) plan
2. Contributions to a §501(c)(18) plan, and
3. Voluntary after-tax employee contributions to a qualified retirement plan or 403(b) annuity. For purposes of the credit, employee contributions will be voluntary as long as they aren’t required as a condition of employment.

An Example

Let’s look at an example to get a better understanding of how the Saver’s Tax Credit works.  Let’s say Tom is a single filer who qualifies for a 20% Saver’s Tax Credit.  His AGI is $18,000 after he contributes $2,000 to his employer’s 401(k) plan.  Tom receives a tax credit equal to 20% of his total contribution of $2,000 (assuming 2013 income limits).  That means Tom will pay $400 less in taxes than he would have paid had he not contributed to his 401(k).

The credit is a “non-refundable” tax credit. That means that while it can reduce your tax liability to zero, you won’t get back any remaining credits.

Next Steps

If you qualify for the Saver’s Tax Credit, all you have to do is fill out the correct forms.  Many low-to-mid earners use the 1040EZ form to file taxes.  Unfortunately, this is a problem because the credit can only be claimed on Forms 1040A, 1040, and 1040NR.  The tax credit can significantly reduce your tax bill, so you might seriously consider switching forms. 

As noted above, if you use software to fill out your taxes, make sure you answer all the questions about the Saver’s Credit, Retirement Savings Contributions Credit, and Credit for Qualified Retirement Savings Contributions.  Answering these questions can help guide you in the right direction and ensure you receive your tax credit.  If you don’t use software, but instead prepare your taxes by hand, complete Form 8880.  This form will help you find your credit rate, which will tell you the exact amount you will save.  You will then transfer that figure to Form 1040A, 1040, or 1040NR.

This credit is designed to help workers who contribute money towards their retirement.  Unfortunately, only 12% of full-time workers in households making less than $50,000 know about it.  Don’t be part of that 88% and miss out on this easy savings opportunity.