What is the Saver's Tax Credit?

To adequately prepare for retirement, some experts say you should aim to save 15% of your income each year. For many of us, that’s a difficult task.

Whether you live in an area with a high cost of living or you’re working to pay down debt, it can be hard to make saving for retirement a priority. But the Saver’s Tax Credit could provide the extra retirement savings incentive that many of us need.

For those who qualify, the Retirement Savings Contributions Credit (Saver’s Tax Credit) gives an additional tax credit on top of the tax deduction you get for contributing to a tax-deferred retirement account. Here’s everything you need to know about the Saver’s Tax Credit and how to determine if you qualify.

What is the Saver’s Tax Credit?

The Saver’s Tax Credit is a non-refundable tax credit the IRS created to encourage low- and moderate-income earners to save for retirement. Depending on their income level, savers can earn a credit of 10%, 20% or 50% of the contributions they make to an eligible retirement account.

The maximum credit an individual can qualify for is $1,000. And the maximum credit is $2,000 for those who are married filing jointly. That means if you qualified for the highest credit percentage (50%), you could earn a credit for every dollar you contribute up to $2,000 (for single filers) or $4,000 (married filing jointly).

What are the Eligibility Rules?

In order to qualify for the Saver’s Tax Credit, you’ll need to meet the following basic requirements:

• You must be at least 18 years old.
• You cannot be a full-time student.
• You cannot be claimed as a dependent by someone else.

After these basic criteria, there are two main factors that affect your eligibility for the Saver’s Tax Credit.

• Your annual income will need to fall within certain income limits.
• Your retirement contributions must be made in an eligible retirement account.

Income Limits for the Saver’s Tax Credit

The income limits for the Saver’s Tax Credit change slightly from year to year. Below, you’ll find the income limits for 2020 as well as 2019.

2020 Saver’s Credit Income Limits

2019 Saver’s Credit Income Limits

Eligible Retirement Accounts for the Saver’s Tax Credit

Contributions to traditional and Roth IRAs are both eligible for the Saver’s Tax Credit. And any money that you contribute to an employer-sponsored plan qualifies as well. Here’s a quick list of eligible retirement plans:

• 401(k)
• SIMPLE IRA
• SARSEP
• 403(b)
• 501(c)(18)
• 457(b)

Also, as of 2018, you may be able to get a credit for contributions to your Achieving a Better Life Experience (ABLE) account if you’re the designated beneficiary.

It should be pointed out that rollover contributions are ineligible for the Saver’s Tax Credit. And if you received any IRA distributions during the year, that could reduce the size of your credit.

Finally, you’ll need to make sure that you meet the contribution deadline. For most employer-sponsored accounts, you’ll need to make your contribution by the end of the calendar year. But for individual IRAs, you have until April 15 of the following year to make an eligible contribution for the previous tax year.

How Could the Saver’s Tax Credit Affect Your Tax Bill?

With the Saver’s Tax Credit, your retirement savings actually reduces your tax liability twice. First, if your contributions were made to a tax-deferred account, like a Traditional IRA or 401(k), you’ll receive an income tax deduction.

But, with the Saver’s Credit, you could also earn an actual tax credit for your contributions. Credits are more valuable than deductions because they reduce your tax liability dollar for dollar.

To help you see how the Saver’s Tax Credit could affect your tax bill, imagine that you’re a married-filing-jointly filer who earned $38,000 last year and contributed $4,000 to a Traditional IRA.

First, you’d receive a $4,000 tax deduction for your contributions, reducing your taxable income to $34,000. But because your income level would qualify for the 50% Saver’s Tax Credit bracket, you’d also earn a $2,000 credit. That’s a big win-win!

Are There Downsides to the Saver’s Tax Credit?

There aren’t any real negatives to claiming the Saver’s Tax Credit. But its income limits will inevitably disqualify many from being able to claim the credit. And there are a few other limitations to keep in mind.

First, it’s important to realize that this is a non-refundable credit. So if your tax liability is already $0, the Saver’s Tax Credit won’t benefit you. Learn the differences between refundable and non-refundable tax credit.

Second, you can only earn credit for contributions up to $4,000, even though the contribution limits for retirement accounts are higher. With Traditional IRAs, for example, you can contribute up to $6,000 per year and 401(k) plans have even higher contribution limits.

But don’t forget that all of the contributions you make to eligible retirement accounts still receive tax-sheltering benefits. So if you’re able to contribute more than $4,000 to your retirement plan, you should do so, even though it won’t earn you a tax credit.

How to Claim the Saver’s Tax Credit

If you plan to file a paper tax return for Tax Year 2018 or 2019, you’ll need to use Form 8880, “Credit for Qualified Retirement Savings Contributions” to claim the Saver’s Tax Credit. But for tax years prior to 2018, you can only claim the Saver’s Tax Credit by using form 1040A, 1040 or 1040NR.

Most tax prep software can automatically fill out Form 8800 for you if you qualify. In fact, many of the top tax software companies include the Saver’s Tax Credit Form with the free editions of their software. See the best tax software companies.

Comparing the Best Tax Software Programs

Bottom Line

With the Saver’s Tax Credit, you can essentially get back up to 50% of the money that you contribute towards your retirement. And that’s a great motivation to take your retirement savings goals off the back burner.

But the downside to the Saver’s Tax Credit is that many taxpayers won’t qualify for it due to the income restrictions. And even if you do qualify for a credit, it may only be for 10% to 20% of your contributions, which drops the max credit for individuals to $200 or $400.

The truth is that most people shouldn’t expect a huge Saver’s Tax Credit. But no matter what credit you qualify for, it’s still more valuable than a deduction. So if you’re eligible for a Saver’s Tax Credit of any amount, be sure to take advantage of the free money that you’re entitled to.