Rules and Income Limits for the Retirement Savings Contribution Credit
The Saver's Credit Can Lower Your Taxes While You Save for Retirement
The Retirement Savings Contribution Credit, also known as the Saver's Credit, is a federal tax credit designed to encourage low- and modest-income individuals to save for retirement. It is a portion of what you have 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 type 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—do not 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 aged 18 or older. Finally, you cannot be claimed as anyone's dependent.
The Saver's Credit is limited by your adjusted gross income (AGI) based on your filing status. For 2019, you become ineligible for the credit if you are single, married and filing a separate return, or if you are a qualifying widow(er) and your AGI is not more than $32,000. This limit increases to $48,000 for head of household filers and to $64,000 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 2019. It is $4,000 for married taxpayers who file joint returns.
If you are single, married filing separately, or a qualifying widow(er), you are eligible for a credit of 50 percent of your contributions up to $2,000 if your AGI is $19,250 or less in 2019. This drops to 20 percent of your contributions if your AGI is between $19,251 and $20,750, and to 10 percent if your AGI is between $20,751 and $32,000.
Head of household filers can claim a credit for 50 percent of their contributions with an AGI of $28,875 or less. The 20 percent credit is available with an AGI of $28,876 up to $31,125, and it decreases to 10 percent from $31,126 until your AGI caps out at $48,000.
The 50 percent limit for married taxpayers filing joint returns is an AGI of $38,850. The 20 percent credit is available for an AGI of up to $41,501. AGIs of $41,501 to $64,000 qualify for the 10 percent credit.
Doing the Math
As an example, if 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 are eligible for a credit of 10 percent of this amount or $600. You cannot claim the entire $2,000 because you fall into the 10-percent category—you are 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 would 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. They were introduced in 2014. Beneficiaries must have become disabled prior to age 26. These accounts also qualify for the Saver's Credit 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 do not 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 will not have to include the Roth distributions in your taxable income when you retire. A Roth plus the Saver's Credit can be a 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.
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.