Retirement Saving Contribution Credit Explained
If you are planning your wealth management strategies for investing, you may have looked into the different areas where you can apply the money you’ve been saving up, such as a pension, an annuity, a brokerage account, or the stock market.
Whether you are seeking advice from a financial advisor or navigating the research on your own, you should know that individuals who make retirement savings contributions may be eligible to claim the Retirement Saving Contribution Credit.
TABLE OF CONTENTS
What Is The Retirement Saving Contribution Credit?
Who Is Eligible To Claim The Retirement Saving Contribution Credit?
Which Retirement Accounts Count For The Retirement Savings Incentive?
Do rollover contributions qualify for the Retirement Saving Contribution Credit?
How Much Is The Retirement Saving Contribution Credit Worth?
How To Claim The Retirement Saving Contribution Credit
Key Takeaways:
- The Retirement Saving Contribution Credit, sometimes referred to as the Saver’s Credit, is a type of tax credit offered to eligible taxpayers who contribute to an IRA or employer-sponsored retirement plan, or an ABLE account if they are the designated beneficiary.
- Taxpayers can claim the Retirement Saving Contribution Credit for contributions made to a Roth or traditional IRA, 401k, 403b, governmental 457b, SARSEP, SIMPLE plan, TSP, 501(c)(18)(D), or an ABLE account if they are the designated beneficiary.
- The Retirement Saving Contribution Credit is worth 10%, 20%, or 50% of the first $2,000 (or $4,000 if filed jointly) of the taxpayer’s eligible contributions, depending on their adjusted gross income (AGI), making the maximum credit amount $1,000 (or $2,000 if filed jointly).
- Taxpayers can claim the Saver’s Credit by filing IRS Form 8880, Credit for Qualified Retirement Savings Contributions.
What Is The Retirement Saving Contribution Credit?
The Retirement Saving Contribution Credit, also known as the Saver’s Credit, is a type of tax credit that is offered to eligible low- and moderate-income taxpayers who contribute to retirement savings plans.
This retirement savings account could be a personal IRA or an employer-sponsored retirement plan. Additionally, taxpayers who are the designated beneficiary of their Achieving a Better Life Experience (ABLE) account may also be able to claim the tax credit for contributions.
Who Is Eligible To Claim The Retirement Saving Contribution Credit?
In order to meet the requirements to claim the saver’s credit, the taxpayer must:
1. Be aged 18 or older,
2. Not be claimed as a dependent on another taxpayer’s tax return, and
3. Not be a student.
Taxpayers are considered students in this context if they:
- Were enrolled as a full-time student at a school during any part of 5 calendar months of the tax year, or
- Participated in a full-time, on-farm training course offered by a school or a local, county, or state government agency during any part of 5 calendar months of the tax year.
The term “school” in relation to the Retirement Saving Contribution Credit could refer to technical, mechanical, and trade schools, but does not include on-the-job training courses, schools offering courses through the internet only, or correspondence schools.
Which Retirement Accounts Count For The Retirement Savings Incentive?
Taxpayers can invest in several types of retirement plans that allow them to claim tax credits. These retirement savings account types are:
- Roth IRA contributions,
- Traditional IRA contributions,
- Elective salary deferral contributions to a 401k,
- Elective salary deferral contributions to a 403b,
- Elective salary deferral contributions to a governmental 457b,
- Elective salary deferral contributions to a SARSEP,
- Elective salary deferral contributions to a SIMPLE plan,
- Voluntary post-tax employee contributions made to a retirement plan, such as the Thrift Savings Plan (TSP) or 403b,
- 501(c)(18)9D) contributions, or
- ABLE account contributions if the taxpayer is the designated beneficiary.
Do rollover contributions qualify for the Retirement Saving Contribution Credit?
No, rollover contributions are not considered eligible for the Saver’s Credit. Additionally, if you have received any recent distributions from your individual retirement arrangements, IRA, or ABLE account, these funds may be deducted from their eligible contributions.
How Much Is The Retirement Saving Contribution Credit Worth?
The value of the retirement account contribution tax credit depends on the taxpayer’s adjusted gross income (AGI) that is reported on their IRS Form 1040 tax return and their filing status.
Additionally, the maximum contribution amount that may qualify for the tax credit is $2,000 for single filers or $4,000 for joint filers. This means that the maximum Retirement Saving Contribution Credit is $1,000 for single filers who are eligible for the 50% tax credit rate, or $2,000 for those who are married.
The credit amount will equal 10%, 20%, or 50% of their eligible contributions depending on those details.
Tax Credit Rate: 50% of Eligible Contributions
Married Filing Jointly: AGI less than $43,500
Head of Household: AGI less than $32,625
Other Filers: AGI less than $21,750
Tax Credit Rate: 20% of Eligible Contributions
Married Filing Jointly: AGI between $43,501-$47,500
Head of Household: AGI between $32,626-$35,625
Other Filers: AGI between $21,751-$23,750
Tax Credit Rate: 10% of Eligible Contributions
Married Filing Jointly: AGI between $47,501-$73,000
Head of Household: AGI between $35,626-$54,750
Other Filers: AGI between $23,751-$36,500
Tax Credit Rate: 0% of Eligible Contributions
Married Filing Jointly: AGI more than $73,000
Head of Household: AGI more than $54,750
Other Filers: AGI more than $36,500
How To Claim The Retirement Saving Contribution Credit
In order to claim the Saver’s Credit, taxpayers must file IRS Form 8880, Credit for Qualified Retirement Savings Contributions.
Understanding the tax credits you are eligible for as a taxpayer is an excellent strategy to save money on your personal and business taxes. If you need help understanding which tax credits and tax deductions you are eligible for or if you want guidance on the tax preparation process, schedule a free meeting with a tax consultant at Ideal Tax to optimize your tax savings.
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