Q: I can get a tax credit in addition to a tax deduction for contributing to my IRA or 401(k)? That sounds too good to be true.
A: Yes, the Retirement Savings Contributions Credit (Saver's Credit) can significantly boost retirement savings for eligible individuals, and it can be combined with the other traditional tax incentives for retirement contributions.
What is the Saver's Credit?
The Saver's Credit is a non-refundable tax credit designed to encourage low to moderate-income individuals and families to save for retirement. It provides a direct incentive for eligible taxpayers to contribute to qualified retirement savings plans such as IRAs, 401(k)s, and other similar accounts.
Key Benefits
Tax Savings: Eligible individuals can claim a non-refundable tax credit of up to $1,000 for single filers, or $2,000 for married couples filing jointly.
Combine with Other Tax Incentives: The Saver's Credit can be combined with other retirement tax savings incentives for an amplified effect. For instance, individuals may still deduct their contributions to retirement accounts such as a traditional IRA or 401(k) in addition to taking the Saver's Credit.
Encourages Retirement Savings: The Saver's Credit serves as a motivator for taxpayers who might otherwise be hesitant to save for retirement.
Accessible for Low- and Moderate Income Individuals: The Saver's Credit is specifically tailored to support those with modest incomes.
Who is Eligible?
You are eligible for the credit if you're:
Age 18 or older
Not claimed as a dependent on another person’s return, and not a student
Not filing Married Filing Separately
Your adjusted gross income (AGI) is less than $34,000 for single filers or $68,000 for joint filers.
How Much is the Credit?
Depending on your AGI, the amount of the non-refundable credit is 50%, 20% or 10% of:
Contributions you make to a traditional or Roth IRA
Elective salary deferral contributions to a 401(k), 403(b), governmental 457(b), SEP, or SIMPLE plan
Voluntary after-tax employee contributions made to a qualified retirement plan (including the federal Thrift Savings Plan) or 403(b) plan
Contributions to a 501(c)(18)(D) plan or to an ABLE account
The maximum contribution amount that may qualify for the credit is $2,000 ($4,000 if married filing jointly), making the maximum credit $1,000 ($2,000 if married filing jointly).
Non-Refundable
The Saver's Credit is a non-refundable tax credit. Like other non-refundable credits, you need a tax liability to benefit. The credit only reduces tax you'd otherwise owe. So, while contributions to traditional IRAs and 401(k)s are pretax (tax deductible), the double benefit of the Saver's Credit is achieved when you have actual income tax owed (after any other non-refundable credits).
Double Benefit Example
John and Jane are a married couple with a modest 2022 adjusted gross income (AGI) of $43,000 and no other tax credits or other retirement plans. After the standard deduction of $25,900, their taxable income is $17,900 and their tax is $1,790.
If they decide to contribute $2,000 to a traditional IRA, it drops their AGI to $41,000. After the standard deduction, their taxable income is $15,100 and their tax is $1,513. That's a small tax savings of $278, but it gets better.
John and Jane are also eligible for a 50% Retirement Saver's Tax Credit ($1,000) on their $2,000 IRA contribution. The $1,000 tax credit reduces their tax to $513.
Thus, a $2,000 traditional IRA contribution reduces John and Jane's taxes by $1,277. Or looking at it another way, their $2,000 contribution is effectively only $723 out of pocket. Not bad! For a net $723, John and Jane have put $2,000 to work in their retirement account.
Conclusion
The Saver's Credit can be a powerful incentive for moderate income individuals to save for retirement and leverage their retirement contributions. Always consult with a tax professional to determine your eligibility and the exact tax savings for your particular situation. The IRS also maintains an Interactive Tax Assistant Tool to help determine if you qualify for the Saver's Credit.