Many people struggle to carve out the funds they need to build their retirement nest egg. Fortunately, a non-refundable tax credit, called the Retirement Savings Contribution Credit, can make saving a lot easier. Often referred to as a savings credit, it provides qualified individuals with tax relief beyond the tax deductions they may receive from contributions to their Individual Retirement Accounts (IRAs) or employer-sponsored plans. By reducing taxes payable, the credit offsets the cost of funding a retirement account, thereby enhancing savings potential.
Key points to remember
- The Saver’s Credit is available to eligible taxpayers contributing to an employer-sponsored retirement plan or a traditional and/or Roth IRA.
- The amount of the credit is determined by several factors, such as an individual’s retirement plan contributions, tax filing status, and adjusted gross income (AGI).
- This credit is not available to persons under 18, full-time students, or anyone declared as a dependent by another taxpayer.
What is the saver’s credit?
The Saver’s Tax Credit is a non-refundable tax credit available to eligible taxpayers who make salary deferral contributions to 401(k), 403(b), SIMPLE, SEP, or government sponsored 457 plans. the employer. It is also available to those who contribute to Traditional and/or Roth IRAs. As of 2018, contributors to tax-advantaged savings accounts for people with disabilities and their families (so-called ABLE accounts) became eligible for the savings credit.
Depending on income levels (see tables below), the credit is worth 10%, 20% or 50% of a person’s eligible contribution, but caps are in place. The maximum credit allowed for those filing as head of household is $2,000, while married couples filing jointly can claim up to $4,000. Refundable credits and the adoption credit are not factored into the equation.
Who is eligible?
To be eligible for the saver’s credit, an individual must be at least 18 years of age at the end of the applicable tax year. They cannot enroll as a full-time student and cannot be claimed as a dependent on another taxpayer’s return. Finally, the adjusted gross income (AGI) of an individual must not exceed the following limits:
|Credit rate||Married Filing Jointly||head of household||All other registrants|
|50% of your contribution||AGI no more than $41,000||AGI no more than $30,750||AGI no more than $20,500|
|20% of your contribution||$41,001 to $44,000||$30,751 to $33,000||$20,501 to $22,000|
|10% of your contribution||$44,001 to $68,000||$33,001 to $51,000||$22,001 to $34,000|
|0% of your contribution||Over $68,000||Over $51,000||Over $34,000|
|Credit rate||Married and files a joint return||Files as head of household||Other applicants|
|50%||Up to $39,500||Up to $29,625||Up to $19,750|
|20%||$39,501 to $43,000||$29,626–$32,250||$19,751 to $21,500|
|ten%||$43,001 to $66,000||$32,251 to $49,500||$21,501 to $33,000|
|0%||Over $66,000||Over $49,500||Over $33,000|
As the charts above illustrate, the lower an individual’s AGI, the higher the saver’s credit.
For example, Jane, whose tax status is single, has an AGI of $19,200 for the 2022 tax year. She contributes $800 to her employer-sponsored 401(k) plan, plus $600 to her Traditional IRA. Jeanne is therefore eligible for a non-refundable tax credit of $700 [($800 + $600 = $1,400) × 50%].
The effect of the saver’s credit
Claiming a savings credit when contributing to a retirement plan can reduce an individual’s tax burden in two ways. First, the contribution to the plan itself is eligible as a tax deduction. Second, the saver’s credit reduces the actual taxes owed, dollar for dollar.
Consider the following example: Jill, a married salesperson, earned $38,000 in 2022. That year, she contributed $1,000 to her IRA, while her unemployed husband generated no income. After deducting his IRA contribution, the AGI shown on his joint return is $37,000. In this case, Jill is entitled to claim a 50% credit of $500 for this IRA contribution.
When is retirement savings not eligible?
Any money contributed to a retirement account that exceeds the authorized limit must be withdrawn from the account within a certain period of time. The returned part of the contribution is not eligible for credit by the saver. Similarly, if an individual changes jobs and consequently transfers money from one retirement account to another – say, from an employer-sponsored 401(k) to a traditional IRA – then that contribution is also ineligible for the saver’s credit.
The savings loan makes it possible to effectively increase an individual’s retirement savings power. Those who qualify for this credit and do not take advantage of this opportunity are wasting a simple way to add significant value to their nest egg.