Rules and Income Limits for the Retirement Savings Contribution Credit

The Savers Credit can lower your taxes while you save for retirement

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The Retirement Savings Contribution Credit, called the Saver's Credit for short, is a federal tax credit designed to encourage low- and modest-income individuals to save for retirement. It's a portion of what you've saved during the year ranging from 10 to 50 percent. How much of your contributions you can claim depends on your overall income and your filing status.

You can contribute to just about any kind of retirement plan, including 401(k) plans, traditional IRAs, Roth IRAs, SEP-IRAs, SIMPLE IRAs, the federal Thrift Savings Plan, and 403(b) plans. Rollover contributions—when you move money from one retirement plan to another—don't qualify.

Qualifying for the Retirement Savings Tax Credit

You can qualify for the Saver's Credit if you meet five criteria. There are income limits and you must have contributed money to a retirement plan. You can't be a full-time student, and you must be age 18 or older. Finally, you cannot be claimed as anyone's dependent.

Income Limits

The Saver's Credit is limited by your adjusted gross income (AGI) based on your filing status. As of the 2018 tax year, you become ineligible for the credit if you're single, married and filing a separate return, or if you're a qualifying widow(er) and your AGI is not more than $31,500. This limit increases to $47,250 for head of household filers and to $63,000 for taxpayers who are married and file joint returns.

The Dollar Amount of the Saver's Credit

The amount of the tax credit is calculated based on a percentage of your retirement contributions. The maximum credit is $2,000 for single, head of household, qualifying widow(er)s, and married filing separately taxpayers as of 2018. It's $4,000 for married taxpayers who file joint returns.

If you're single, married filing separately, or a qualifying widow(er), you're eligible for a credit of 50 percent of your contributions up to $2,000 if your AGI is $19,000 or less in 2018. This drops to 20 percent of your contributions if your AGI is between $19,001 and $20,500, and to 10 percent if your AGI is between $20,501 and $31,500.

Head of household filers can claim a credit for 50 percent of their contributions with an AGI of $28,500 or less. The 20 percent credit is available with an AGI of $28,501 up to $30,750, and it decreases to 10 percent from $30,751 until your AGI caps out at $47,250.

The 50 percent limit for married taxpayers filing joint returns is an AGI of $38,000. The 20 percent credit is available for an AGI of up to $41,000. AGIs of $41,001 to $63,000 qualify for the 10 percent credit.

Doing the Math

As an example, let's say that you qualify as head of household and you contribute $500 a month, or $6,000 a year, to a qualifying retirement plan. Your AGI is $45,000 so you're eligible for a credit of 10 percent of this amount or $600. You can't claim the entire $2,000 because you fall into the 10-percent category—you're limited to 10 percent of what you contributed.

But if you managed to contribute $6,000 a year on an income of $28,500, you could claim a credit of $2,000. You'd be entitled to a credit of 50 percent of your contributions up to that $2,000 limit, even though 50 percent of $6,000 works out to $3,000.

If You Have an Achieving a Better Life (ABLE) Account

ABLEs are tax-advantaged savings accounts that can be established on behalf of disabled individuals and their families since 2014. Beneficiaries must have become disabled prior to age 26. These accounts also qualify for the Saver's Credit as well beginning in 2018.

You must be the designated beneficiary of the account to claim the Saver's Credit. The same income limits and other requirements apply based on filing status, and rollovers from other accounts don't qualify as contributions.

As the account owners, beneficiaries can contribute to these accounts as well as family and friends, but only the beneficiary's own contributions are eligible for the Saver's Credit.

Consider a Roth IRA if You Qualify

Consider contributing to a Roth IRA If you qualify for the Retirement Savings Tax Credit. Your contributions enjoy tax-free growth when you invest in a Roth and you won't have to include the Roth distributions in your taxable income when you retire. A Roth plus the Saver's Credit can be a very tax-efficient combination.

Claiming the Saver's Credit

Complete Form 8880 (PDF) and attach it to your Form 1040A or 1040 to claim the credit.

Note: Tax laws change periodically and you should always consult with a tax professional for the most up-to-date advice. The information contained in this article is not intended as tax advice and it is not a substitute for tax advice.