What’s retirement savings contribution credit?

When saving for retirement, one rule of thumb recommends saving eight times your annual salary by age 65. However, most Americans fall behind this target, and at least half of Americans do not have a retirement savings plan. To encourage low-income and moderate-income earners to save for retirement, the government introduced the retirement savings contribution credit.

The retirement savings contribution credit, also known as the Saver’s Credit, is a non-refundable tax credit that is provided to low and moderate-income individuals who contribute to a retirement plan such as 403(b), 401(k), 457 (b), IRA, SIMPLE IRA, SEP IRA, or ABLE retirement plan. The Saver’s credit is calculated as a percentage of your contributions, either 10%, 20%, or 50%.

What is Retirement Savings Contribution Credit?

The federal government created the Retirement Savings Contribution Credit, also known as the Saver’s Credit, in the early 2000s. It was designed to help low- and moderate-income individuals and couples save for retirement by providing tax incentives. While you get a tax deduction when you contribute to a traditional IRA or 401(k), the Saver’s Credit provides additional incentives.

Depending on your filing status and adjusted gross income, you may be able to claim 10%, 20%, or 50% of the eligible retirement contributions you make to a qualifying retirement plan. The maximum credit you can get is $1000 for individuals, and up to $2,000 for married couples filing jointly.

For example, if you are a single filer and you are eligible for the 50% credit tier, and you contribute $1,000 to an eligible retirement plan, you can claim a tax credit of $500 (50% of $1,000). If you contribute $2,000 to the retirement plan, you can claim the maximum credit of $1,000 (50% of $2,000). If you contribute more than $2,000 to your retirement plan, you cannot claim more than $1,000 in credits.

How much is the saver’s credit?

You can claim up to $1,000 saver’s credit as an individual, and up to $2,000 for married couples filing jointly. As a single filer, you can claim the tax credit on up to $2,000 in contributions to an eligible retirement plan. If you are married filing jointly, you can claim the tax credit on up to $4,000 in contributions to an eligible retirement plan.

The amount you can claim as a tax credit depends on your AGI and filing status. Here are the income limits for each Saver’s Credit percentage tier:

10% Saver’s Credit

You can get up to $200 tax credit as an individual, or $400 if you are a married couple filing jointly. In 2023, the income limits are $23, 751 to $36,500 for single filers, $35,626 to $54,750 for heads of household, and $47,501 to $73,000 for married couples filing jointly.

20% Saver’s Credit

You can get up to $400 credit as an individual, or up to $800 for married couples filing jointly. In 2023, the income limit is $21,751 to $23,750 for single filers, $32,626 to $35,625 for heads of household, and $43,501 to $47,500 for married couples filing jointly.

50% Saver’s Credit

You can get up to $1,000 tax credit as an individual, or $2,000 for married couples. For 2023, the income limits are $21,750 or below for single filers, $32,625 or below for heads of household, and $43,500 or below for married couples filing jointly.

Who can claim the Retirement Savings Contribution Credit?

You must meet several requirements to claim the tax credit. You must be age 18 or older, you should not be a full-time student, and you should not have claimed as a dependent on another individual’s tax return.

You must contribute to an eligible retirement plan, including a traditional or Roth 401(k), IRA, 403(b), 457(b) plan, SIMPLE IRA, SEP IRA, or ABLE retirement plan. Your income must fall under the maximum adjusted gross income (AGI) caps set by the IRS. For 2023, the Saver’s Credit is available to single filers with a maximum AGI of $36,500, heads of households with a maximum AGI of $54,750, and married couples filing jointly with a maximum AGI of $73,000.

How to claim the Retirement Savings Contribution Credit

If you are eligible for the tax credit, you can claim the tax credit using IRS Form 8880 “Credit for Qualified Retirement Savings Contributions”. IRS Form 8880 is a one-page form that you can print out from the IRS website, fill it out, and mail it to the IRS address. You can also file IRS Form 8880 electronically.

The Saver’s Credit is a tax credit (not a deduction), meaning that it reduces your taxable income dollar-for-dollar. On the other hand, a deduction reduces your taxable income and the taxes you pay, but not on a dollar-for-dollar basis. Also, the tax credit is non-refundable, and you won’t get a tax refund if the tax for the year is zero.

Which retirement accounts qualify for the credit?

You can claim the Saver’s Credit if you make pre-tax contributions to employer-sponsored plans like 401(k), 403(b), 457(b), 501(c)(18), or SIMPLE IRA. You may also be eligible to claim this credit if you make after-tax contributions to a Roth IRA or if you are a designated beneficiary of an ABLE retirement plan.

However, not all contributions to retirement plans are eligible for the tax credit. Any excess contributions above the annual contribution limit won’t be eligible for the saver’s tax credit. If you receive employer-matching contributions, you cannot claim a tax credit on these contributions. Also, if you change jobs and roll over your retirement savings into another retirement plan, the amount rolled over won't be eligible for the saver's credit.