Saver's Credit: The Little-Known Retirement Savings Tax Break.

The Saver’s Credit, formerly known as the Retirement Savings Contributions Credit, provides low- and moderate-income taxpayers who are contributing to a retirement plan with special tax breaks. It was first made available in 2002 and according to a Transamerica survey report (link), only 36% of qualifying taxpayers are taking advantage of the credit. This little-known retirement savings tax break can, if you qualify, reduce or even eliminate your tax bill.

The Saver’s Credit is an actual tax credit, not a tax deduction from income. This means the credit is a dollar-for-dollar reduction of your federal income tax liability making it  an even more valuable monetary benefit. The Saver’s Credit is non-refundable, meaning it can only be subtracted from the taxes you owe, possibly down to zero, but it cannot provide you with a tax refund. 

You are eligible for the credit if you are:

  • Age 18 or older
  • Not a full-time student
  • Not claimed as a dependent on another person’s return
  • Within the limits for adjusted gross income (AGI)

The Saver’s Credit can be utilized for your contributions to a:

  •  Roth IRA
  • Traditional IRA
  • Simple IRA
  • SEP
  • 403(b) 
  • 457(b) 
  • 401(k) 
  • SIMPLE 401(k) 

Important Notes: 

  • Rollover contributions are not eligible for the Saver’s Credit.     
  • You cannot use the credit for employer matching contributions.
  • Taking distributions from a retirement account can impact the credit.

What are the deadlines you must meet?

You must have contributed to a 401(k) plan or similar workplace plan by the end of the year to claim this credit. However, you can contribute to an IRA by the due date of your tax return, which is usually April 15th, and still have it count towards your credit amount. 

What is the amount of the credit?

The amount of the credit is 50%, 20% or 10% of your retirement account contributions up to $2,000 ($4,000 if married filing jointly), depending on your adjusted gross income. 

Below is a chart from IRS.gov site to calculate the amount of credit you can qualify for: *Single, married filing separately, or qualifying widow(er)

Saver's Credit Chart.png

Using the chart above:

Example: Mary files as a head of household. She contributes $1,400 to her 401(k) plan this year. If her 2018 adjusted gross income is $25,000, then she can claim 50% Saver’s Credit for her contribution, worth $700.

How do I claim the Savers Credit?

Form 8880(link) will allow you to calculate your credit and this form can be attached to form 1040, 1040A or 1040NR.  The Saver’s Credit is not available on the 1040 EZ form. If you think you qualify and did not take the credit, you can go back and amend returns from up to three years ago. For more information visit IRS.gov.

Most qualifying taxpayers miss out on the benefits of this valuable retirement savings tax credit. The Saver’s Credit was created to provide qualifying individuals incentive to contribute pretax dollars to retirement plans and reduce or possibly eliminate the amount of taxes owed to help ensure a more financially secure retirement.
 

Carol Chaudet

(Last updated 5/14/2018)