A lot of people struggle to find the funds they need to build their retirement savings. Fortunately, a non-refundable tax credit, known as a retirement savings credit, can make saving a lot easier. Often referred to as a saver’s credit, it allows eligible individuals to benefit from tax considerations in addition to the deductions they may get on contributions to their IRAs or employer-sponsored plans. By reducing tax debt, the credit offsets the cost of funding a retirement account and ultimately boosts savings potential. qualified
- The Saver’s Credit is open to qualified taxpayers who contribute to an employer-sponsored pension plan or the traditional IRA and Roth.
- The figure of the credit is determined by several factors, such as tax filing status, a person’s contributions to the pension plan, and adjusted gross income.
- This credit is not available to people under 18, full-time students, or any person declared to be dependent on another taxpayer.
What is the saver’s credit?
This is a non-refundable tax credit available to eligible taxpayers who make deferred contributions to government-sponsored SIMPLE, SEP, 401(k), 403(b), or 457 plans. It is also available for traditional and Roth IRA contributors. Those who contributed to tax-advantaged savings accounts for people with disabilities and their families (called ABLE accounts) are eligible for the saver’s credit.
Based on income levels, the credit is worth 50%, 20%, or 10% of a person’s eligible contribution, but there are defined limits. The maximum credit allowed for the head of household is $2,000, while couples filing jointly can claim up to $4,000.
Who is eligible?
To qualify for the saver’s credit, a person must be at least 18 years of age at the end of the applicable tax year, must not have enrolled as a full-time student and cannot be claimed on another taxpayer declaration as a dependent.
Finally, a person’s AGI must not exceed the following limits:
As the graph illustrates, the lower a person’s AGI, the higher the saver’s credit.
For example, Jamal, whose filing status is single, has an adjusted gross income of $ 19,200 for 2021. He contributes $800 to the employer-sponsored 401(k) plan, plus $ 600 to his Traditional IRA. Therefore, Jamal is entitled to a non-refundable tax credit of $ 700 [($ 800 + $ 600 = $1,400) x 50%].
The effect of the saver’s credit
Applying for a saver’s credit by contributing to a retirement plan can reduce a person’s tax burden in two ways. First, the contribution to the scheme itself is considered a tax deduction. Second, the saver’s credit lessens the actual taxes owed, dollar for dollar.
Consider the following example. John, a married retail worker, made $ 38,000. That year, he gave $1,000 to the IRA, while his unemployed wife earned no income. After subtracting his IRA contribution, the AGI shown on his joint return is $ 37,000. In this case, John is entitled to apply for a credit of $500 at 50% for the IRA contribution.
When are retirement savings ineligible?
Any amount of money paid into a pension account that exceeds the authorized limit must be withdrawn from the account within a certain period. The returned part of the contribution is not eligible for saver’s credit. Additionally, suppose a person changes jobs and transfers money from one pension account to another, for instance, from a traditional IRA to an employer-sponsored 401 (k) plan. In that case, that contribution is not eligible for the saver’s credit.
The Bottom Line
Saver’s credit can increase the savings power of a person’s pension. Those who qualify for this type of credit and do not take full advantage of this are wasting an easy way to add meaningful value to their savings. It would be best if you consult us before taking a saver’s credit.