Using The Saver's Credit For Your Retirement

The Least Well-Known Retirement Tax Break

Using The Saver's Credit For Your Retirement
April 14, 2016

Saving for retirement is a challenge for everyone, and that challenge is greater if you have a lower income. Fortunately, if you are in this situation, you can receive some significant help from… the IRS?

It's true - the IRS offers a tax credit specifically intended for your situation. The Saver's Tax Credit offers a tax credit of up to $4,000 for joint filers or $2,000 for individual filers. Note that this program is a tax credit and not a deduction, meaning that the amount you qualify for is subtracted directly from the taxes that you owe.

To be eligible, you must be at least 18 years old, not classified as a full-time student and not be listed as a dependent on anyone else's tax form.

Benefits are scaled based on your Adjusted Gross Income (AGI). For 2015, you do not qualify if your AGI is above $61,000 with a married filing jointly status, $45,750 when filing as Head of Household, and $30,500 as a single filer.

You can receive a tax credit equal to 10% of your contributions at the following income ranges: $39,501 to $61,000 for married filing jointly, $29,626 to $45,750 as the head of household, and $19,751 to $30,500 for single filers.

The next tier is 20% of your contributions at these ranges: $36,501 to $39,600 for married filing jointly, $27,376 to $29,625 as the head of household, and $18,251 to $19,750 for single filers.

With incomes below that level for your filing category, you qualify to receive 50% of your contribution as a tax credit.

Therefore, to get the maximum possible $4,000 credit possible as a married couple, your household AGI has to be $36,500 or less, and you had to contribute $8,000 to your retirement accounts. That's almost 22% of your total AGI - a staggering amount if you are living on low wages.

However, that is the point of the program. It is extremely difficult to resist the temptation to use that money for other purposes, and it may not always be practical - but your default position should be to save and claim the credit instead of spending.

The only downside is that the Saver's Tax Credit is a non-refundable credit. That means you have to owe at least that much in taxes to take the full credit you deserve - the credit does not wipe out your tax burden and send you a refund check for the difference. It also does not carry over from year to year.

The plan covers virtually all retirement plans: traditional and Roth IRAs, 401(k)s, SIMPLE IRAs, SARSEPs, and 403(b), 457, and 501(c)(18) plans. Rollover contributions are not eligible.

Any distributions that you are receiving from an IRA or retirement account may reduce your eligible contribution. You would have to have corresponding contributions to offset the difference and receive your full credit.

To claim your tax credit, you will need to fill out IRS Form 8880, "Credit for Qualified Retirement Savings Contribution", and send it in with your regular tax form. You will need to fill out your 1040 or similar form first to find out your AGI and determine the rate you qualify for, as well as whether you owe enough in taxes to be able to claim the full credit.

If you fall in these lower income ranges, consider the Tax Savings Credit. It may apply to you only partially, or not at all, depending on the amount of tax that you owe - but it does not cost you anything to find out, and every little bit of tax savings helps… especially at lower incomes.



Photo ©iStock.com/DNY59

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Steffanie | 04.14.16 @ 18:54
I have never heard of this credit. Will definitely be checking into it. Thanks for the information.
Carla Truett | 04.14.16 @ 18:55
This may be worth checking into. We need all the help we can get in our retirement years. I had never heard of it until now.
Jo Ann | 04.14.16 @ 18:56
These are great savings for retirement savers on a mediocre income. Those tax credits do add up at the end of the year. It is just a shame that it is so hard to save that money when you are at these income levels.
Erin | 04.14.16 @ 18:56
I don't think I have ever heard of this credit. It looks likes it is a great idea for low-income families...if they are able to save. This is one I will be looking into more. Thanks!
Stokes | 04.14.16 @ 18:56
I've used this before. It was a great way to squirrel money away from the IRS.
Nancy | 04.14.16 @ 18:57
Retirement is coming sooner rather than later for me, so this is definitely worth looking into.
Jonathan | 04.14.16 @ 18:57
Awesome idea! Thanks for sharing!
$commenter.renderDisplayableName() | 12.05.16 @ 16:45
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