The Retirement Savings Contributions Credit is a federal income tax credit designed to encourage low- and modest-income individuals to save for retirement. This tax credit, which is sometimes referred to as the Saver's Credit, works out to a portion of what you've saved during the year, ranging from 10% to 50% of your contributions up to certain limits. The percentage you can claim depends on your adjusted gross income (AGI) and your federal income tax filing status.
Rollover contributions—money that's moved from one retirement plan to another—don't qualify.
Your AGI is your gross income—including wages, dividends, capital gains, and business income—minus adjustments to income, including retirement account contributions, student loan interest, and alimony payments.
Qualifying for the Credit
You need to meet a handful of criteria to qualify for the Saver's Credit. You must:
- Meet income limits
- Have contributed money to a retirement plan
- Not be a full-time student
- Be aged 18 or older
- Not be claimed as any other taxpayer's dependent
The Saver's Credit is limited by your AGI, and your AGI is based on your filing status. For the 2020 tax year, you become ineligible for the credit if you're single, married, and filing a separate return, or a qualifying widow(er) and your AGI is more than $32,500. For head of household filers, you become ineligible when your AGI is more than $48,750, and for those who are married and filing jointly, you cannot together make more than $65,000.
For the 2021 tax year, singles and those who are married filing separately need an AGI of $33,000 or less. Head of household filers need an AGI of less than $49,500, and those who are married filing jointly need an AGI of less than $66,000.
For the 2019 tax year, the eligibility limits are $32,000, $48,000, and $64,000, respectively.
These income limits are adjusted annually to keep pace with inflation.
Calculating Your Credit
The amount of your tax credit is a percentage of your retirement contributions. The maximum contribution limit the credit can be applied toward is $2,000 for taxpayers who file as single, head of household, qualifying widow(er), or married filing separately. It's $4,000 for married taxpayers who file a joint return. The percentages break down like this:
- You're eligible for a credit of 50% of your contributions up to $2,000 if you're single, married filing separately, or a qualifying widow(er), and your AGI is $19,500 or less in 2020 or $19,750 or less in 2021. This drops to 20% of your contributions if your AGI is $19,501 to $21,250 in 2020 or $19,751 to $21,500 in 2021. It drops to 10% if your AGI is $21,251 to $32,500 in 2020 or $21,501 to $33,000 in 2021.
- Head of household filers can claim a saver's credit for 50% of their contributions up to $2,000 with AGIs of $29,250 or less in 2020 or $29,625 or less in 2021. The 20% credit is available to those with AGIs of $29,251 to $31,875 in 2020 or $29,626 to $32,250 in 2021. It decreases to 10% for those with AGIs from $31,876 to $48,750 in 2020 or $32,251 to $49,500 in 2021.
- The 50% credit on contributions up to $4,000 for married taxpayers who file a joint return is available for those with a combined AGI of $39,000 or less in 2020 or $39,500 or less in 2021. The 20% credit is available for those with a combined AGI of $39,001 to $42,500 in 2020 or $39,501 to $43,000 in 2021. The 10% credit is available for those with a combined AGI of $42,501 to $65,000 in 2020 or $43,001 to $66,000 in 2021.
Doing the Math: An Example
Let's say 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 in 2020 so you're eligible for a credit of 10% of the $2,000 contribution limit. That works out to a credit of $200.
You could claim a credit of $400, or 20% of the contribution limit, if your income were $30,000. You would be entitled to a credit of 50% of the $2,000 limit—or $1,000—if your AGI were $29,000.
That amount—$1,000—is the maximum credit available in 2020 unless you're married and file a joint return. In that case, the maximum credit increases to $2,000.
Provisions for ABLE Accounts
Achieving a Better Life Experience (ABLE) accounts are tax-advantaged savings accounts that can be established on behalf of disabled individuals and their families. They were first introduced in 2014. Beneficiaries must have become disabled prior to age 26. These accounts became qualified for the Saver's Credit beginning in 2018 under the terms of the Tax Cuts and Jobs Act.
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 in this type of account either.
As the account owner, a beneficiary may contribute to these accounts, as well as family and friends, but only the beneficiary's own contributions are eligible for the Saver's Credit.
Claiming the Credit
To claim the Saver's Credit on your federal income tax return, first complete IRS Form 8880. Transfer the amount that appears on line 12 to Schedule 3, line 4. Then transfer the total of all nonrefundable credits you qualify for on line 7 of Schedule 3 to line 20 of your Form 1040. Attach Form 8880 and Schedule 3 to your tax return.
If you use tax preparation software, it will prompt you to answer questions about your retirement savings and can complete these forms automatically for you.
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