Saver’s credit is a non-refundable tax credit that allows eligible taxpayers who are saving for retirement to enjoy tax breaks apart from the tax deductions they may receive from contributions to their employer-sponsored plans or individual retirement accounts (IRAs).
If you qualify for a saver’s tax credit, you can reduce or eliminate your tax bill, ultimately bolstering your savings potential. However, not many eligible taxpayers take advantage of this tax break simply because they are unaware of it.
Key Takeaways
What is the saver’s credit?
The saver’s credit is a non-refundable tax credit that allows eligible taxpayers who contribute to a retirement savings plan(s) to reduce or eliminate their overall tax amount owed.
Although the saver’s credit reduces or eliminates the tax you owe, it can’t provide you with a tax refund.
Who is eligible for saver’s credit?
You’re eligible for the saver’s credit if you meet the following criteria:
| Filing Status | Income Threshold in 2021 | Income Threshold in 2022 |
|---|---|---|
| Married joint filer | $66,000 | $68,000 |
| Head of household filer | $49,500 | $51,000 |
| Single filing status | $33,000 | $34,000 |
How much could the saver’s credit cut from my tax bill?
The maximum credit you can claim on your contributions decreases as your income increases.
2021 Adjusted Gross Income:
| Credit | Married Joint Filers | Head of Household | Single/Other Filers |
|---|---|---|---|
| 50% | Up to $39,500 | Up to $30,750 | Up to $20,500 |
| 20% | $39,501–$43,000 | $30, 751 –$33,000 | $20,501–$22,000 |
| 10% | $43,001–$66,000 | $33,001–$51,000 | $22,001–$34,000 |
| 0% | More than $68,000 | More than $51,000 | More than $ 34,000 |
| Credit | Married Joint Filers | Head of Household | Single/Other Filers |
|---|---|---|---|
| 50% | Up to $41,000 | Up to $29,625 | Up to $19,750 |
| 20% | $41,001–$44,000 | $29,626–$32,250 | $19,751–$21,500 |
| 10% | $43,001–$66,000 | $32,251–$49,500 | $21,501–$33,000 |
| 0% | $44,001–$68,000 | More than $49,500 | More than $33,000 |
Example:
Peter and Jane are married and file their returns jointly. Peter contributes $1000 to his 401(k), and Jane contributes $1000 to her IRA. Their combined adjusted gross income for 2022 is $38,000. Therefore, both Peter and Jane are eligible to claim 50% credit for the contributions they make to their respective retirement plans. Their non-refundable tax credit $1,000 (50% of $1,000 x 2 = $1,000).
Which retirement accounts qualify for the saver’s credit?
You can claim the saver’s credit if you are making a contribution to any of the following retirement accounts:
Effect of the Saver’s Credit
When you claim your saver’s credit on your contribution to a retirement plan, you can reduce your tax burden in two ways:
Example:
Jane, a married customer service executive, earned $35,000 in 2021. She contributed $1,000 to her IRA, but her unemployed husband had zero earnings. After subtracting Jane’s IRA contribution, the AGI on her jointly filed return is $34,000. This makes Jane eligible for claiming a 50% credit of $500 for her IRA contribution of $1000.
How to claim the saver’s credit?
Use Form 8880 (Credit for Qualified Retirement Savings Contributions) and attach it to your 1040, 1040A, or 1040NR when you file your tax return to claim the saver’s credit.
When are retirement savings not eligible?
Retirement savings are not eligible for the saver’s credit in the following situations:
Key Takeaway
The saver’s credit can boost your retirement savings potential. If you qualify for the saver’s credit and don’t take advantage of this opportunity, you are losing out on a simple way to add significant value to your retirement fund.
Rick Pendykoski is the owner of Self Directed Retirement Plans LLC, a retirement planning company based in Goodyear, AZ. He has over three decades of experience working with investments and retirement planning, and over the last ten years has turned his focus to self-directed ira accounts and alternative investments. If you need help and guidance with traditional or alternative investments, call him today (866) 639-0066.
