Aside from having funds for one’s sunset years, the Retirement Saver’s Credit is another incentive to save up for retirement. Today’s article explains what it is and how it works.
In this article:
- What Is the Retirement Savers Credit?
- How Does the Retirement Savers Tax Credit Work?
- How Does One Qualify for the Retirement Savers Credit?
- Does a Taxpayer Get a Savers Tax Credit for Contributing to an IRA?
- How Much Is the Retirement Saving Contribution Credit?
- Can a Taxpayer Claim the Savers Credit on Retirement Contributions Under Automatic Enrollment?
- Can a Taxpayer Claim Both the Earned Income Tax Credit and the Savers Credit?
- Can a Taxpayer Use the Savers Credit to Offset Both a Regular Income Tax and Alternative Minimum Tax Liabilities?
- How Can a Taxpayer Claim His or Her Savers Tax Credit?
Retirement Saver’s Credit: “What Is It?” and Other FAQs
What Is the Retirement Savers Credit?
The Retirement Saver’s Credit provides a unique tax break for low- and moderate-income taxpayers saving up for their sunset years. This is on top of the other tax benefits such taxpayers enjoy from contributing to specific retirement accounts.
The Retirement Saver’s Credit can only be applied to the first $2,000 of one’s total annual retirement contributions. The maximum credit rate is 50%, which means the maximum annual Saver’s Credit in dollars is $1,000 per taxpayer.
The Retirement Saver’s Credit allows a worker to claim tax credits up to a maximum of 50% of retirement contributions for the year. If one contributes $2,000 in a retirement account for the year, that person can claim up to $1,000 (or 50% of $2,000) in tax credits.
Most eligible taxpayers don’t take advantage of the Saver’s Credit because they don’t know about it. In the most recent survey by the TransAmerica Center for Retirement studies, six of 10 American workers aren’t aware of retirement tax credits like the Saver’s Credit.
How Does the Retirement Savers Tax Credit Work?
Tax credits are different from mere tax deductions.
A tax deduction reduces one’s tax liabilities indirectly by reducing the taxable income. On the other hand, a tax credit directly reduces one’s tax liabilities because the IRS removes them from taxes owed. In most cases, it can result in a bigger tax reduction benefit than tax deductions.
- Let’s consider a single taxpayer who earned $39,000 in 2019.
- The applicable tax rate is 12%, which is a $4,680 income tax for 2019.
- A tax deduction of $1,000 will apply to taxable income, which in this case is $39,000. This brings down taxable income to $38,000 and income tax to $4,560, which is a mere $120 reduction.
- A tax credit of $1,000 applies directly to income taxes owed, which in this case is $4,680. Applying the $1,000 tax credit brings taxes owed by this taxpayer down to only $3,680.
However, the Retirement Saver’s Credit is not refundable. This means taxpayers can use it to bring down the taxes they owe but they can’t get a tax refund.
How Does One Qualify for the Retirement Saver’s Credit?
One must be at least 18 years old and must not be a full-time student or another taxpayer’s qualified dependent. Also, one can avail of the credit if the retirement contributions fall on the same year as the tax return.
Does a Taxpayer Get a Saver’s Tax Credit for Contributing to an IRA?
Yes, taxpayers can claim Saver’s Credit on their IRA contributions, as well as their contributions to employer-sponsored retirement accounts. These include 401(k) and other similar accounts.
For employer-sponsored accounts, however, taxpayers can only claim Saver’s Credit on their contributions and not on their employers’ contributions.
How Much Is the Retirement Saving Contribution Credit?
The following table enumerates applicable tax credit rates according to tax-filing status and annual income bracket for 2019:
Applicable Credit Rate
|Married and Jointly Files Tax Returns||Single and Head of Household||Other Filing Statuses|
|Maximum of $38,500||Maximum of $28,875||Maximum of $19,250|
$38,501 up to $41,500
$28,876 up to $31,125
$19,251 up to $20,750
$41,501 up to $64,000
$31,126 up to $48,000
$20,751 up to $32,000
|0%||Over $64,000||Over $48,000|
- Joe is a single person whose tax-filing status is the head of the family and earned $30,000 in 2019. Also, he contributed a total of $2,000 to his Traditional and Roth IRAs in 2019.
- Given his income level, he can claim a 20% Retirement Saver’s Credit rate of 20% of his $2,000 retirement contributions.
- He can claim a credit of $400.
- Joan files taxes jointly with her husband James.
- Joan and James contribute $1,500 and $2,500 respectively to their retirement accounts in 2019. They made $35,000 that year.
- Joan can claim a 50% credit on her $1,500 retirement contribution, which is equivalent to $750. Because the Saver’s Credit applies only to the first $2,000 in annual retirement contributions, James can only apply the 50% credit to $2,000 of his total contributions for 2019, which is a $1,000 tax credit.
- When they file their taxes jointly as a couple, James and Joan can claim a total tax credit of $1,750. Their combined tax liability for the year will be reduced by this amount.
Can a Taxpayer Claim the Saver’s Credit on Retirement Contributions Under Automatic Enrollment?
Yes, because all elective retirement plan contributions made by and on behalf of an eligible taxpayer to an employer-sponsored retirement plan qualifies for the Saver’s Credit.
Can a Taxpayer Claim Both the Earned Income Tax Credit and the Saver’s Credit?
Yes, that person can claim both tax credits.
The earned income tax credit, or EITC, rewards lower and low-middle income workers for earning income. In particular, the EITC targets workers with children.
Unlike the Saver’s Credit, EITC is a refundable tax credit. This means a taxpayer doesn’t owe the IRS any taxes — he or she can claim it as a cash refund.
Can a Taxpayer Use the Saver’s Credit to Offset Both a Regular Income Tax and Alternative Minimum Tax Liabilities?
Yes, a taxpayer can do that.
How Can a Taxpayer Claim His or Her Saver’s Tax Credit?
A taxpayer can use Form 8880, which is the “Credit for Qualified Retirement Savings Contributions” form. For those amending prior year returns before 2018, they can continue using the old 1040A or 1040Z forms.
The Retirement Saver’s Credit is one of the best ways to prepare for retirement. Not only does it encourage saving up for one’s sunset years, but it also helps increase one’s after-tax income, which can be used to save more money for retirement or for other important things in life.
Before reading this article, were you aware of the Retirement Saver’s Credit and how you can benefit from it? Let us know in the comments section below.
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