Retirement Saver's Credit for 2018

How Saving for Retirement Can Reduce Your Taxes With a Credit

Saving for retirement can be a major challenge when you're paying off debt or building up savings for short-term goals or emergency reserves. Fortunately, the IRS gets that, and it provides an incentive through a special tax credit designed specifically for low- and moderate-income taxpayers. 

The Saver's Credit, formerly known as the Retirement Savings Contributions Credit, provides these taxpayers with a special tax break.

They can claim the credit for a portion of the income they contribute to a qualifying retirement plan. 

Tax Credits vs. Tax Deductions 

A tax credit is a dollar-for-dollar reduction of your gross tax liability—the total amount of taxes you're responsible for paying as you finish your tax return. You might owe the IRS $3,000, then you go back and claim a $1,000 credit. Now you only owe $2,000.

The Saver's Credit is non-refundable, which means that it can reduce your income tax liability, but the IRS won't be sending you a check for any balance that might be left over. This is nonetheless better than a tax deduction, which can only reduce your taxable income. 

Are You Eligible for the Saver's Credit?

You must be at least 18 years old to qualify for the Saver’s Credit. You can't be a full-time student, or be claimed as a dependent on another person’s tax return.

You must make eligible contributions to your IRA or employer-sponsored retirement plan for the tax year in which you're claiming the credit.

How Much Can the Credit Cut Your Tax Bill?

The tax credit is 50%, 20%, or 10% of your retirement plan or IRA contributions for the year. How much of a percentage you can claim depends on your adjusted gross income.

The Saver's Credit is most beneficial for taxpayers with low incomes. The maximum credit amount is $1,000 as of 2019, or $2,000 if you're married and filing jointly—50% of $2,000 in contributions or $4,000 in contributions.

Your adjusted gross income (AGI) must be less than $32,000 in 2019 to qualify for the credit if your filing status is single or married filing separately. Head of household filers are limited to AGIs below $48,000. Married couples filing jointly are eligible with AGIs of less than $64,000.  

The 2019 Saver's Credit 

The fist column defines how much of your contribution you can claim, followed by the income parameters for each percentage for the different filing statuses. The single status includes those who are married and filing separately, as well as qualifying widow(er)s.

AGI figures indicate income less than the cited lesser amount, and not more than the higher amount. 

                                         Married Joint        Head of Household    Single 

50% of your contributions$38,500$28,875$19,250
20% of your contribution$38,501 - $41,500$28,876 - $31,125$19,251 - $20,750
10% of your contribution$41,501 - $64,000$31,126 - $48,000$20,751 - $32,000
No credit available$64,000$48,000$32,000

Contributions for the 2019 tax year can be made up until the April 15, 2020 deadline. SEP IRA contributions can be extended until the tax-filing extension deadline if you're self-employed.

An Example

Susan is a married taxpayer filing a joint tax return with gross income of $38,500.

Her spouse had no earned income during 2019.

She would like to save money for retirement and decides to contribute $2,000 to a Roth IRA to take advantage of the potential tax-free growth of earnings. Susan can claim a 50% credit, or $1,000, for her $2,000 contribution.

Susan's credit would be limited to 20%, or just $400, if she earned $40,000. It would drop to 10% or $200 of her $2,000 contribution if her AGI was $50,000. She would not be eligible to claim the credit at all if she earned $65,000. 

Contributions for the 2018 Tax Year 

The income thresholds for the credit percentages are indexed for inflation. They can increase annually. Different figures apply if you want to claim the credit for the 2018 tax year. 

                                         Married Joint        Head of Household   Single 

50% of your contributions$38,000$28,500$19,000
20% of your contribution$38,001 - $41,000$28,501 - $30,750$19,001 - $20,500
10% of your contribution$41,001 - $63,000$30,751 - $47,250$20,501 - $31,500
No credit available$63,000$47,250$31,500

Eligible Retirement Accounts

The Saver's Credit can be claimed when you make contributions to certain types of retirement accounts:

  • Traditional or Roth IRAs
  • 401(k) plans
  • 403(b) plans
  • 457(b) plans
  • Thrift Savings Plans (TSP)
  • SIMPLE IRAs
  • Simplified Employee Pension (SEP) plans
  • Section 501(c)(18) plans

Contributions aren't eligible for the Saver's Credit if you completed a rollover from a qualified plan or an IRA.

Your eligible contributions would be reduced by the amount received if you took any distributions from a retirement plan or IRA. 

How to Claim the Saver's Credit

File IRS Form 8880, "Credit for Qualified Retirement Savings Contributions," to take advantage of the Saver's Credit. You must use the Form 1040 tax return or Form 1040NR. The 1040 replaces Forms 1040-EZ and 1040-A effective 2018—those tax forms are no longer available.