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The Saver’s Tax Credit for Retirement Savings Contributions Print
Monday, 13th October 2008 (by J.D.)This article is about Planning, Retirement, Taxes
When you don’t have much money, it can be difficult to save for the future. Last month I highlighted San Francisco’s Earned Asset Resource Network, a non-profit organization providing financial assistance and education to those who need it most.
Believe it or not, the U.S. government also has ways to encourage people to save. The Saver’s Credit for Retirement Savings Contributions is one of those:
One way for low and moderate income Americans to save on taxes is by saving for retirement. If you make voluntary contributions to an employer-sponsored retirement plan or to an individual retirement arrangement, you may be able to take a tax credit.
Formally known as the “Retirement Savings Contributions Credit,” the Saver’s Credit applies to:
- Married individuals filing separately and single with incomes up to $26,500 for 2008
- Married couples, filing jointly, with incomes up to $53,000 for 2008
- Head of Household with incomes up to $39,750 for 2008
To be eligible for the credit you must be at least age 18, not be a full-time student, and cannot be claimed as a dependent on another person’s return. You may be able to take a credit of up to $1,000 (up to $2,000 if filing jointly) if you make eligible contributions to a qualified IRA, 401(k) and certain other retirement plans. The amount of the credit is determined by your filing status, your adjusted gross income, and your other retirement contributions.
This tax credit is applied on a sliding scale. I can’t find the scale for 2008, but it’s sure to be similar to last year’s, which you can find on Form 8880 [46kb PDF]. Up to $2,000 of your retirement annual contributions can be used to determine the credit.
To learn more about this tax credit, read chapter five (“Retirement Savings Contributions Credit”) of IRS Publication 590, “Individual Retirement Arrangements”.
October 13th, 2008 at 3:16 pm
Awww really? SWEET!
October 13th, 2008 at 4:18 pm
Huh. I’d never heard of this before, but I will definitely look into it when tax time rolls around this year.
October 13th, 2008 at 4:22 pm
word.. i’ve never heard of this either.. sounds like a good deal.. hopefully i’ll remember to research this once tax season hits again
October 13th, 2008 at 4:39 pm
Well I can’t take it… maybe I should get married >.<
October 13th, 2008 at 4:44 pm
My husband and I have qualified for this for a while, we love it (Thanks to our great tax guy for telling us this). It does encourage us to save. It’s like getting paid extra interest to save money. We may not qualify this year - too bad. I’m hoping though, I may need to buy some more equipment for the business to get low enough for qualification.
October 13th, 2008 at 5:55 pm
Is this based off of your AGI or gross income?
October 13th, 2008 at 7:54 pm
this is a really good tax break… it’s a dollar for dollar tax deduction (as in each dollar you save is almost like a rebate check).
October 13th, 2008 at 8:14 pm
It is based off AGI.
Too bad the phase out is so low! In 2007, $15.5k for Single & $31k for MFJ. I doubt too many people making less than $26.5k have too much left over to sock into their retirement savings with the way the prices of everything has been going up.
I did qualify last year only because I was job searching for the first half of the year. Saved me $790 on my tax bill.
It is a great credit if you qualify and have the wherewithal to contribute to your retirement savings!
October 13th, 2008 at 10:10 pm
I make around, 28K a year, 6-7% goes to my company’s 401k every two weeks, Im single, dont go to school, and work full time. Am I eligible for this?
October 13th, 2008 at 10:53 pm
I ran a tax program for the military last year. I absolutely LECTURED those young enlisted kids about contributing to TSP (our version of a 401K). Many of them were able to get 50% of their retirement contributions back as a tax credit - in part because our income often appears lower than it really is due to the tax free basic allowance for housing. This retirement credit is a great deal, and one of my favorite parts of the tax code!
October 14th, 2008 at 5:12 am
I’ve always been annoyed that this doesn’t apply to full-time students!! My husband has been working on a masters and now post-grad work for the last 5 years (with 4 more yrs to go). We have put $1000-2000 in our roth iras each year but don’t get the tax credit b/c of he is a full-time student. We are clearly under the income requirements. Does anyone know why there is an exception for students? It seems unfair to penalize those who are working hard to get through school debt-free and save for the future.
October 14th, 2008 at 6:01 am
@ realmoneygrows:
It all depends on your AGI (take a look at last years 1040 on line 38 (or 1040A, line 22 or 1040NR, line 36). If you were under $26k last year, you likely qualified for this credit and will likely qualify again in 2008. Due to your income being at the top of the threshold, you will probably only be able to take a $200 max credit for this (this is due to the phase out I commented on earlier).
$200 is still $200. You may want to take a look at your 2007 return to see if you qualify. It may be beneficial to file an amended return to get your credit for 2007.
October 14th, 2008 at 6:05 am
we’ve used the savers tax credit the last 3 years, but only because TurboTax has it as one of the “questions” it asks you…. otherwise i would have never known about it….
October 14th, 2008 at 7:11 am
Maybe I’ll qualify for this credit next year. I can’t take it this year since I’m a full-time student and my income will be below taxable level anyway.
October 14th, 2008 at 7:12 am
I tried to take advantage of it near the end of last year, but I was a full time student so lost out. After graduation it brought me out of the AGI limits so I will not get it still, oh well, I am better off now with higher income anyway. I will make sure to point it out to others again this year.
October 14th, 2008 at 8:23 am
Thanks for this information. I may just qualify this year.
October 14th, 2008 at 11:29 am
If you qualify, TurboTax will apply this credit automatically.
October 14th, 2008 at 5:07 pm
Wow. No offense, but that sucks. I never realized how much better Canada’s policies were compared to the US’s.
In Canada, you can defer the income tax on contributions to a registered retirement savings plan (RRSP). Your annual contribution limit is 18% of your previous year’s income, up to a maximum of $20,000 for 2008 ($21k for 2009, $22k for 2010, etc. - it increases with inflation). There is no maximum income cutoff after which you’re not eligible for this credit. If you earned $100,000, then you can stash $20,000 of it in an RRSP and get back the income tax you paid on that $20,000. That’s not a trivial amount!
The one drawback is that if you have a company pension, then they reduce how much you’re allowed to invest in your RRSP. But if, like my wife and I, you have no company pension at all, then you’re allowed the maximum each year. We have a combined RRSP contribution limit of $40,000 this year. If we were to take full advantage of that, we’d get an income tax refund of over $15,000. That’s a great start to the next year’s RRSP contribution. And unused contribution room carries forward indefinitely.
The drawback is, once you retire and start withdrawing from your RRSP, your withdrawals are taxed as regular income, rather than the preferred taxation treatment afforded to dividend or capital gains income. However, after you retire, your income will be lower anyway, and you’ll be in a lower tax bracket.
Even better, starting next year, our government is phasing in another savings program called the Tax Free Savings Account (TFSA), which is basically like a Super-Roth-IRA. Individuals are allowed to contribute $5,000/year (regardless of income, and also indexed for inflation over time). It’s not tax-deductible, but it is allowed to grow tax-free. However, unlike a Roth IRA, you can withdraw your money at any time, with no penalty at all. Even better, if you take money out, you get that contribution room back! So if I contribute $5,000 this year, then next year I’m allowed to contribute $5,000 more. However, if I take out my original $5,000, I’m now allowed to contribute $10,000. You get the room back. It’s actually pretty sweet.
On the other hand, you can’t deduct mortgage interest in Canada. Still, I think our retirement programs are far superior to those of the US. Maybe if people had more incentive to save, and people were more used to living below their means, this whole credit fiasco could’ve been avoided? Bah, who am I kidding.
I almost feel we’re given too many incentives in Canada. If my wife and I wanted to max out our RRSPs ($20,000 each) and our TFSAs ($5,000 each), we’d need $50,000! I consider us pretty aggressive savers, but we can still only manage about $30,000 or so this year. Fortunately, the unused room carries forward to next year, so we get another chance to try and max that out.
October 14th, 2008 at 11:02 pm
Kevin - we’re not talking about deferring income tax - that’s a given with a 401K. We are talking about an additional dollar for dollar tax credit that reduces the additional tax you owe on your income or what have you.
So for every dollar you put into a 401K, not only are you saving that dollar from being taxed in the present (it will be taxed when you withdraw it in the future), but you are ALSO getting anywhere from an additional 10 cents to 50 cents off your tax bill. The IRS is basically paying you to save.
Granted the income limits are pretty stiff for the tax credit, but you can still defer tax payments by contributing to a 401K - the income limits on this are MUCH higher if they exist at all.
October 16th, 2008 at 6:56 am
There’s a draft version of the 8880 for 2008 here: http://www.irs.gov/pub/irs-pdf/f8880.pdf
October 16th, 2008 at 7:01 am
@ Chris,
That is not a draft of the 2008 form. That is simply 2007’s form. Although, I can’t imagine much will change other than the Table on Line 9 to show the $500 increase.
October 16th, 2008 at 11:38 am
Wrong link. Sorry. Here it is. http://www.irs.gov/pub/irs-dft/f8880–dft.pdf
Mike, you’re right about the $500 increase.
October 22nd, 2008 at 8:47 am
Is this taxable income, or gross income?
October 22nd, 2008 at 1:34 pm
The limit for this credit is way too low. Last year when I doing my taxes I got excited to see that I could take a tax credit for some of my 401k contributions. When I was looking at the instructions though it said you needed an AGI of 26,000 or so and I was bummed. What full time worker out of college makes less than 28,000 (pre-tax) and also contributed to a 401k? This amount is before the personal exemption and standard deduction. So if you’re making more than 28,000 you’d need a lot of deductions from interest on student loans, educator expenses, tuition (of course if you’re in school you can’t even take the credit anyway). It seems to me the only people who can really stand to benefit are young married couples where one person make a decent amount of money and the other makes very little. Like usual the single middle class guy gets no credit for saving and don’t get me started on the fact that interest earned on savings accounts is taxable. I thought we were supposed to be encouraging savings?
November 26th, 2008 at 10:57 pm
@Chris from St. Mary’s: The link you shared to the draft Form 8880 is very helpful. It has the right breakdown. It can be backed up by the breakdown described on this page: http://www.irs.gov/newsroom/article/0,,id=187833,00.html
@Dana: The saver’s credit is based on your Adjusted Gross Income (AGI), not taxable income. This makes it a bit harder to qualify.
January 29th, 2009 at 8:54 am
Anyone out there appreciate irony?
I knew my income would be very low this year, so I took the opportunity to convert a small ($3,000) traditional IRA to a Roth. This gave me a big tax advantage, but it also raised my income for the year from $15k to $18k.
This means my credit for my 401(k) contributions plummets from $1000 to $200, meaning taking care of my retirement actually hurt me in taking care of my retirement!
This is a VERY awkward stepdown. You mean to tell me that a single person with an AGI of $16,000 gets a $1000 credit, but a person with an AGI of $16,001 gets only $400?
January 29th, 2009 at 9:01 am
@Josh,
You can undo the conversion! This would lower your taxable income for the year as well as save you on the taxable income since I am sure the value has gone down.
http://finance.yahoo.com/focus-retirement/article/105556/Undoing-a-Roth-Conversion?mod=retirement-IRA
January 29th, 2009 at 5:15 pm
@Mike,
Why do you rock so hard?
Thank you SO MUCH for the help! This will save me (or rather, earn me) almost $1200!
January 29th, 2009 at 5:18 pm
@Josh,
Now that I have found you $1,200… Your turn to find me $1,200!