Retirement Savings Contribution Credit - Get a Tax Credit Just for Saving Skip to content
What do you want to do br with money
Popular Searches
Learn more about your money
Make Money
You need it. Learn how to make it. Explore Manage Money
You've got it. Learn what to do with it. Explore Save Money
You have it. Make sure you have some later too. Explore Spend Money
You're spending it. Get the most for it. Explore Borrow Money
You're borrowing it. Do it wisely. Explore Protect Money
You don't want to lose it. Learn how to keep it safe. Explore Invest Money
You're saving it. Now put it to work for your future. Explore Categories
About us
Find us
Close menu What do you want to do br with money
Popular Searches
Learn more about your money
Make Money
You need it. Learn how to make it. Explore Manage Money
You've got it. Learn what to do with it. Explore Save Money
You have it. Make sure you have some later too. Explore Spend Money
You're spending it. Get the most for it. Explore Borrow Money
You're borrowing it. Do it wisely. Explore Protect Money
You don't want to lose it. Learn how to keep it safe. Explore Invest Money
You're saving it. Now put it to work for your future. Explore Categories
About us
Find us
Close menu Advertiser Disclosure Advertiser Disclosure: The credit card and banking offers that appear on this site are from credit card companies and banks from which MoneyCrashers.com receives compensation. This compensation may impact how and where products appear on this site, including, for example, the order in which they appear on category pages. MoneyCrashers.com does not include all banks, credit card companies or all available credit card offers, although best efforts are made to include a comprehensive list of offers regardless of compensation. Advertiser partners include American Express, Chase, U.S. Bank, and Barclaycard, among others. Manage Money Taxes Retirement Savings Contribution Credit – Get a Tax Credit Just for Saving
By Janet Berry-Johnson Date September 14, 2021 FEATURED PROMOTION
Saving for retirement isn’t always easy, but there are significant income tax benefits to low- and moderate-income families who choose to prioritize these long-term savings. The Retirement Savings Contributions Credit (otherwise known as the “Saver’s Credit”) is a tax credit designed to encourage retirement savings. It makes it possible for individual filers to receive up to $1,000 as a tax credit, while married couples filing jointly can receive up to $2,000. The best news is that the Saver’s Credit works with any other retirement-based tax incentives you already benefit from. For instance, if you can deduct your 401(k) contributions from your taxes, you may still be able to use the Saver’s Credit, reducing your tax liability even further. Pro tip: If you’re saving for retirement through a 401(k) or IRA, sign up for a free portfolio analysis from Blooom. After connecting your accounts, they will make sure you have the right allocation and are properly diversified. They will also look into the fees you’re paying. Saver s Credit Eligibility
Not everyone is eligible for the Saver’s Credit since it’s a tax credit designed to encourage low- to moderate-income families to start saving for retirement. Therefore, there are limits on age, income level, and filing status.
You own shares of Apple, Amazon, Tesla. Why not Banksy or Andy Warhol? Their works’ value doesn’t rise and fall with the stock market. And they’re a lot cooler than Jeff Bezos.
Get Priority Access First and foremost, the following individuals are ineligible for the credit: Those under 18 years of ageThose who are full-time studentsThose who can be claimed as a dependent on anyone else’s tax return If none of these apply to you, then you may be eligible for a 10%, 20%, or 50% tax credit on your retirement contributions, up to a total contribution of $2,000 for an individual or $4,000 for a married couple filing jointly. That means an individual can receive a credit of up to $1,000 if they contribute $2,000 to a retirement account, while a couple can receive a credit of up to $2,000 if they each contribute $2,000 to their individual retirement accounts (50% of a $4,000 retirement contribution). Filing Status and Income Level
How much of a credit that you’re eligible for is based on your filing status and income level. Married Filing Jointly. If you’re married filing jointly for the tax year 2020, you may qualify for a credit if your adjusted gross income (AGI) is $65,000 or less. The full 50% credit is for married couples making less than $39,000; the 20% credit is for those making between $39,001 and $42,500; and the 10% credit is for those making between $42,501 and $65,000.Head of Household. If you’re filing as a head of household for the tax year 2020, you may qualify for a credit if your AGI is $48,750 or less. The full 50% credit is for individuals making less than $29,250; the 20% credit is for those making between $29,251 and $31,875; and the 10% credit is for those making between $31,876 and $48,750.Single, Married Filing Separately, or Widow(er). If you’re filing as any of these statuses for the tax year 2020, you may qualify for a credit if your AGI is $32,500 or less. The full 50% credit is for individuals making less than $19,500; the 20% credit is for those making between $19,501 and $21,250; and the 10% credit is for those making between $21,251 and $32,500. Remember, the credit is limited to a percentage of your retirement contributions. For instance, if a married couple filing jointly has an adjusted gross income of $40,000, and each contributes $500 to their respective retirement accounts, they would qualify for a 20% tax credit on the total contribution of $1,000. In other words, they would qualify for a $200 tax credit (20% of $1,000 is $200). According to the Congressional Research Service, for the tax year 2016, only 5.6% of all taxpayers claimed the Saver’s Credit, and the average credit amount claimed was $182. Pro tip: By using tax preparation software from a company like H&R Block, you’ll have confidence you’re getting every available tax deduction and minimizing your tax liability. Eligible Retirement Contributions
Almost all retirement plan contributions qualify for the Saver’s Credit, including those contributed to the following accounts: 401(k)403(b)45(7b)Traditional or Roth IRASIMPLE IRASARSEP501(c)(18)ABLE accounts If you participate in an employer-match retirement fund, monies invested by your employer are not eligible for the credit, but your own contributions are eligible. For instance, if you contributed $500 to your 401(k) and your employer matched your contribution, only the $500 you contributed would be eligible for the Saver’s Credit. Finally, if you recently took distributions from a retirement account, your eligibility could be reduced. In other words, if you contributed $2,000 to a retirement account, but you took a distribution of $1,000, your total saver’s credit eligibility would be reduced to $1,000 — the difference between the amount you contributed and the amount you received as a distribution. Increased Benefit Decreased Tax Liability
Like other tax credits, the Saver’s Credit decreases your total tax liability. The amount of tax you owe is directly reduced by the amount of credit you’re eligible for. For instance, if you owe $2,000 to the IRS but have a Saver’s Credit of $500, your tax bill would be reduced to $1,500. However, it’s important to note that the Saver’s Credit itself is a “nonrefundable” credit. In other words, while the credit can reduce your tax liability to $0, you can’t use any “leftovers” to receive a tax refund. For instance, if your total tax liability for 2020 was $516, and you qualified for the full $1,000 Saver’s Credit, your tax liability would simply go down to $0 — you wouldn’t be able to take the remaining $484 as a tax refund. That said, because the Saver’s Credit applies to the first $2,000 an individual voluntarily contributes to retirement (or $4,000 for a married couple filing jointly), taking this credit makes it possible for other refundable credits to add up. The result is either a lower tax bill to Uncle Sam or a greater end-of-year refund. Claiming the Saver s Credit
To include the Saver’s Credit on your 2020 tax refund, simply fill out IRS Form 8880 and turn it in with your 1040. Most tax prep software programs like H&R Block will determine if you’re eligible, fill out the appropriate forms, and apply the savings to your tax bill. Even if you didn’t make significant retirement contributions in 2020, or you want to make more, you still have time to take advantage of the Saver’s Credit. Contributions invested in either a Roth or traditional IRA before April 15, 2021, can be claimed on your 2020 tax return. Unfortunately, contributions to an employer retirement fund, such as a 401(k) or 403(b), must be made by December 31, 2020, to qualify for the 2020 tax year. Final Word
The Retirement Savings Contributions Credit is a permanent addition to the tax code, so even if you’re unable to take advantage of the credit for 2020, start planning for the future. Talk to your employer about setting up automatic contributions to your retirement account at work, or talk with your bank or a financial planner to help you determine which individual retirement account is right for you. Saving for retirement is an incredibly important part of long-term financial planning, and the tax benefits for saving are significant. Enjoy long-term financial stability with regular contributions while also enjoying annual reductions in your tax liability. It’s like having your cake and eating it too. Taxes Manage Money Invest Money Retirement TwitterFacebookPinterestLinkedInEmail Janet Berry-Johnson
Janet Berry-Johnson is a Certified Public Accountant. Before leaving the accounting world to focus on freelance writing, she specialized in income tax consulting and compliance for individuals and small businesses. She lives in Omaha, Nebraska with her husband and son and their rescue dog, Dexter. FEATURED PROMOTION
Discover More Related Articles
Invest Money Taxes Retirement See all Invest Money How to Tap into a Roth IRA for College Savings & Education Retirement Traditional IRA Retirement Account - Benefits & Restrictions Taxes What Is a Tax Credit vs. Tax Deduction - Do You Know the Difference? Retirement What Is a 403(b) Retirement Plan - Contributions, Withdrawals & Taxes Related topics We answer your toughest questions
See more questions Retirement What does the SECURE Act 2 0 mean for retirement savings
See the full answer » Retirement What is a Roth IRA and how do they work
See the full answer »