The savers tax credit explained

savers tax credit illustration

A little known tax credit can help you save for retirement, even if you feel you don't have the money to do so.

The formal name is the Retirement Savings Contributions Credit. Most people, however, know it simply as the Saver's Credit, a two-timing savings strategy that reduces taxes and increases retirement.

By the numbers, here is how the Saver's Credit works: Let's say you pay yourself $2,000 in a qualified retirement plan, such as an IRA or 401(k). If your adjusted gross income is within a certain range (see chart below), the IRS allows you to receive a tax credit up to 50 percent of that contribution or, in this example, $1,000.

Say it ain't so, Joe.

It's true. In essence, you get paid for paying yourself.

Savers Tax Credit Eligibility

In order to receive the tax credit, you do need to meet certain requirements.

  • Age 18 or older
  • Not being claimed as a dependent on another person's return
  • Not a full-time student
  • Adjusted gross income (AGI) does not exceed $61,500 if filing jointly; $46,125 if filing as head of household or $30,750 for all other filers

What is the AGI?

Your AGI is your total gross income minus specific deductions, which are subject to change each year. But some deductions have been allowed each year including: half of the self-employment taxes you may pay, alimony payments, tuition and fees and contributions to certain retirement accounts such as a traditional IRA. Consult with a tax professional to find out all the deductions allowed in 2016.

The 1040 form is the only one that allows you to deduct every possible adjustment. Using form 1040A significantly reduces the number of available adjustments you can take1, according to TurboTax. If you file taxes using the1040EZ form, your AGI equals your total income.

2016 Saver's Credit2

Credit Rate

Married Filing Jointly

Head of Household

All Other Filers*

50% of your contribution

AGI not more than $37,000

AGI not more than $27,750

AGI not more than $18,500

20% of your contribution

$37,001 – $40,000

$27,751 – $30,000

$18,501 – $20,000

10% of your contribution

$40,001 – $61,500

$30,001 – $46,125

$20,001 – $30,750

0% of your contribution

more than $61,500

more than $46,125

more than $30,750

*Single, married filing separately, or qualifying widow(er)

An Example of How the Tax Credit Works

Bob has been unemployed throughout 2016 and will not have any earnings to report for the year. His wife Barbara earned $36,000 working at a retail store. Barbara contributed $1,000 to her IRA in 2016, which resulted in an adjusted gross income on their joint return as $35,000. Barbara is able to claim a 50 percent credit or $500 for her $1,000 IRA contribution.

The Saver's Credit can be taken for your contributions to the following:

  • A traditional or Roth IRA
  • Your 401(k), Simple IRA, SARSEP, 403(b), 501(c)(18) or governmental 457(b) plan
  • Your voluntary after-tax employee contributions to your qualified retirement and 403(b) plans.

If you have further questions about eligibility for the Saver's credit, consult a tax professional. You may find that the IRS will pay you (with a credit) to pay yourself.

1 TurboTax

2 Internal Revenue Service

More about...Taxes

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ambiguator
ambiguator
3 years ago

Who the hell makes $35000 and can afford to put $1000 into an IRA?!?!?
That’s nearly 3% of AGI.
Probably closer to 5% of after-tax income.

Thank you for the info GRS, but this credit seems like a cruel joke.

Get Rich Slowly
Get Rich Slowly
3 years ago
Reply to  ambiguator

Thank you for stopping by! Yes, that hypothetical example is on the extreme end given the cost of living today, but what I found interesting is that the final “cost” with the tax credit was $500 for $1,000 worth of retirement savings. When you add in the power of compound interest, it’s probably the smartest $500 investment one could ever make. It would be hard to come up with the $1,000 on $35,000 annual salary no question, but the good news is the credit goes up to $61,500 (at least a percentage). Maybe in the future the tax code will… Read more »

peoria
peoria
3 years ago
Reply to  ambiguator

As a single person it is very possible to live a nice life off of the income ($18500) that would allow you to take advantage of this. ( With a roommate and in a medium cost of living area) You may need to reevaluate the things that you “need”, or may have dependents that you are supporting. It is all about your priorities. The cool thing is when you can use your 401k and traditional IRA contributions to lower you income to a level that allows the credit. i.e. I make $42000, I max out my 401k and Traditional IRA… Read more »

Lisa
Lisa
3 years ago

We’re married, filing jointly. One of us is a full time student, but the other is not. Would this tax credit apply? Thanks!

Get Rich Slowly
Get Rich Slowly
3 years ago
Reply to  Lisa

Hi Lisa, thank you for stopping by! The credit is based on your earned income, not work status, so as long as you were below the $61,500 upper limit of the credit for married filing jointly, yes, you could claim it. Of course, always double check with a tax professional.

Antony
Antony
3 years ago

Than you for sharing………..:(

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