Just Starting With Retirement Savings? Get All the Credit You’re Due!

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You probably already realize that setting up a systematic savings plan is critical to providing yourself with financial security in the future. There are

tax benefits to simply making contributions to an IRA or a 401(k) – you’ll be able to deduct (or simply not include) those funds in your taxable income come tax time. In addition, the tax-deferred growth of these funds will provide you with a source of income for the future.

But did you realize that there are other tax credits available for certain taxpayers making contributions to retirement plans? It’s called the Saver’s Credit (formally known as the Retirement Savings Contributions Credit), and it’s available for folks who meet certain eligibility requirements who have made contributions to retirement savings plans during the tax year.

Eligibility

Depending upon your filing status, there is a limit to the amount of income that you can have earned in order to take the credit. If your Adjusted Gross Income (AGI) is less than the amount below for your filing status, you are eligible to take at least part of this credit (these are 2019 figures, updated annually).

• Married Filing Jointly – $64,000
• Single, Married Filing Separately, or Qualifying Widow(er) – $32,000
• Head of Household – $48,000

In addition to the income limits, you must have been born before January 2, 2002 (for tax year 2019), therefore age 17 or older for the calendar year. You must also not have been a full-time student during the calendar year, and you cannot be claimed as a dependent on another person’s return.

Amount of Credit

If you fit the eligibility requirements and you made contributions to an IRA (including a Roth IRA), 401(k) or 403(b) (including designated Roth accounts), governmental 457 plan, SEP or SIMPLE plan, or certain other plans, you may be able to take a credit of up to $1,000 ($2,000 if filing jointly). The credit that you’re allowed is determined by both your income and the amount of the contribution that you’ve made, limited to $2,000 for singles and $4,000 for married filing jointly.

In general if you’re married and filing jointly, you can receive up to 50% credit (limited to $2,000 for married filing jointly) if your AGI is below $38,500. This credit gradually reduces down to 10% of your contribution as your AGI increases to the upper limit of $64,000. For Head of Household filing status, the 50% credit (limited to $1,000) applies if your AGI is $28,875 or below, and the upper limit is $48,000, at which point your credit is 10% of your contribution. For all other filing statuses, the 50% credit is available for an AGI below $19,250 and reduces to 10% at the upper limit AGI of $32,000. Again, these figures are for 2019, to be updated when the 2020 figures become available.

It is important to note that this credit is not fully refundable – your ordinary tax (plus any AMT) minus Foreign Tax credit, Credit for Child and Dependent Care Expenses, and Education Credits limits the Saver’s Credit further (see Example 3 below).

Examples

Example 1 You’re single and have an AGI of $23,000, and have made IRA contributions of $2,000 for the year. You do not have any additional credits to claim (those listed above). According to the schedule (found in Form 8880) you are eligible for a 10% credit on up to $2,000 of contributions to your IRA, or $200, as long as your tax is at least $200.

Example 2 You’re married and you file jointly, and you have an AGI of $32,000, and have made contributions to your employer’s 401(k) plan of $5,000 for the year and your spouse has made $2,500 in contributions to his IRA. You also do not have any additional credits to claim. According to the schedule, you are eligible to take the maximum credit of $2,000 – which is 50% of the eligible $2,000 portions of your contributions to the retirement plans for the year, as long as your tax is at least $2,000.

Example 3 You file as Head of Household, you have an AGI of $22,000, have made $1,500 contributions to your employer’s 401(k) plan and have child care credits of $500 – and your total tax before credits is $635.  According to the schedule, you can take a Saver’s Credit of $135, as your net tax after the child care credit is $135. If you had not had the child care credit, you would have been eligible for a Saver’s Credit equal to 50% of your contributions, or $750 – but since your tax is less (at $635), your Saver’s Credit is limited to $635, your total tax liability.

Last Few Comments

One final wrinkle:  you also have to take into account any distributions that you’ve taken (or will be taking up to the due date of the return) for two years prior to the year of the credit or during the year of the credit. This is to keep you from taking a distribution from your IRA, and then making a contribution of that amount back into the account in order to claim the credit.

Other than that, I think this is a great credit – and lots of folks who could take advantage of it aren’t aware of it. It’s a very good incentive to get started in a retirement plan, specifically when income is low and retirement planning isn’t the highest priority. This credit is in addition to all of the other tax benefits that you can receive from contributing to retirement plans.

Most software programs for tax preparation account for this credit automatically these days. But it pays to check up on what the program is doing for you just to make sure you get the credit you deserve!